Jul 20, 2017

Renewable Heating and Cooling: the Next Efficiency Frontier

Clean energy technologies often face several barriers to adoption, both from market conditions and consumer behavior. Renewable thermal technologies (RTTs) used for heating and cooling, such as air- and ground-source heat pumps (ASHP and GSHP, respectively) and solar hot water (SHW) systems are no exception. A field study conducted at Yale found that the biggest barriers to RTT deployment are high upfront costs, lack of customer and installer awareness and trust, and nascent business models. Unlike solar photovoltaic (PV) systems, which are visible installations and can generate positive cash flows, RTTs are out of sight and typically only generate cash savings. On the brighter side, RTTs can utilize many of the same financing products used for energy efficiency (EE). A 2016 study from Lawrence Berkeley National Laboratory illustrates the variety of financing options available to consumers for installing EE technologies; the diagram below shows options specifically relevant for RTTs. Personal credit is among the most popular choices today, but specialized options that leverage the unique financing and marketing capabilities of organizations like the Connecticut Green Bank can deliver more favorable rates and terms to consumers.

Source: Leventis, G., Fadrhonc, E. M., Kramer, C., Goldman, C., 2016. Current Practices in Efficiency Financing: An Overview for State and Local Governments. LBNL-1006406

These financing products can address market and behavioral failures, build marketing momentum, and unlock savings. The choice about which products to use should match the specific market or behavioral failure. For example, a group-purchase discount and information campaign for RTTs will not necessarily help renters living in an apartment; on-bill financing where the payments are transferred to the next tenant, however, could.
 

Group purchasing campaigns

Building on the success of “solarize” campaigns in the residential solar market, “thermalize” campaigns for RTTs aim to tackle market and behavioral failures in a similar way. Published literature on behavioral failures finds that consumers have unreasonably high discount rates (25-36%) when evaluating EE investments, meaning that people value a dollar saved tomorrow disproportionately less than a dollar saved today .[1] (This is unreasonable because it indicates that even with zero-interest loans, people may still hesitate to install RTTs even when the costs are lower than for incumbent alternatives.) Group purchasing campaigns, in which discounts increase as more people sign up, offer multiple solutions to customer inertia. Participants can educate one another about the benefits of the technology in question, negotiate a volume discount with installers, and encourage new entrants, eventually scaling up the market. Solarize campaigns from Portland to Houston have taken the country by storm. “Thermalize” is next.

A great example of a “thermalize” campaign is the HeatSmart Tompkins program in Tompkins County, New York, the first of its kind in the US.  HeatSmart offers EE measures such as insulation and air-sealing, heat pump installations, and bundled packages of both. The program addresses three major barriers. Customer nescience with RTTs and EE measures is tackled by educational and outreach programs in community centers. High upfront costs are mitigated through a price guide providing transparency and a competitive bidding process between vetted installers. Lastly, customer apathy is addressed by framing the program as a limited-time offer, which spurs participation. Additionally, program administrators also assist customers with loan applications for both secured and unsecured loans, such as home improvement and home equity loans. During the inaugural 2015/2016 program, three trusted local installer partners received 300 qualified leads and closed nearly 100 projects totaling over $1.5 million in revenue. The currently ongoing process signed up 175 enrollees prior to the due date. A similar program, Solar Mass Plus, launched in Massachusetts in the fall of 2016.

Third-Party Ownership

Third-party models are another prevalent approach for deploying RTTs. The value proposition often includes vetted installers, increased comfort, reduced carbon emissions, as well as a “guarantee” against rising energy costs. Strong, long-term partnerships between energy services companies, installers, and customers are key to the success of this model.

One example of a third-party model is Diverso Energy’s GSHP “geothermal Power Purchase Agreement (PPA)” product. Diverso is a Canadian ground-source heat pump provider based in Waterloo, Ontario. Incorporated in January 2015, the company mostly focuses on the Toronto region and offers vertical, closed-loop GSHPs for multifamily condominiums and commercial office buildings. The company’s so called “geothermal PPA” works, in part, as a lease, since the company takes on all operating and maintenance costs for the lease term. Diverso invoices the property owners on a monthly basis, who in turn pass on the bill to their tenants. According to Diverso, the main incentive for developers is cost savings from avoiding boiler and cooling tower construction and maintenance. Contrary to popular belief, fuel costs represents less than half of the operational savings on the types of buildings Diverso is targeting. To tackle one of company’s most significant barriers, developer indifference, Diverso establishes long-term trusted relationships with real estate developers. For verification of performance, one installed meter per building provides evaluation, measurement and verification for developers on an annual basis. So far, Diverso manages six projects, with the largest covering 350,000 square feet. These projects are not operational yet as the company is only a little over two years old.

Leasing

A specialized form of third-party ownership is leasing. Green Mountain Power (GMP), Vermont's  largest electric utility, offers two noteworthy leasing programs for RTTs. While Diverso Energy’s customers are real estate developers, GMP tailors its offerings to the residential segment. In 2013, GMP was the first utility to start a leasing program for ductless cold-climate ASHPs and hot water heat pumps for a 15-year term with a buy-out option at the end. GMP manages all the logistics and maintenance of the heat pumps on these operational leases, and charges a fixed monthly fee depending on the capacity of the system. The utility also helps its customers apply for a $600 or $800 point-of-purchase rebate offered by Efficiency Vermont. Over the last 4 years, GMP has leased close to 1,000 heat pumpss with great customer satisfaction, and saw on average a 70-80 percent reduction in fossil fuel consumption in participating homes in the Rutland area.

General takeaways

The evolution of the residential solar PV market has shown that innovative financing and business models are crucial to attracting a critical mass of customers. It takes a village to educate customers and build trust about a new technology. Group purchasing schemes therefore offer a range of promising solutions for the deployment of renewable heating and cooling technologies and, based on the handful of experiments already underway, should be replicated across the country. Financing through third parties and lease programs can also help overcome the vexing issue of high upfront costs and recycle public funds that were used for one-time grants. Similar to solar PV deployment, the standardization of customer acquisition, permitting, and installation can also help RTT markets expand. However, since RTTs are a relatively recent addition to the energy transition toolbox, installers and program administrators have not yet collected sufficient data to evaluate the success of any particular model. Measuring thermal performance is also inherently trickier than counting electrons produced by a solar panel, which makes this task more daunting. Nevertheless, the successful programs showcased here prove that customers, installers, and program administrators have been discovering the benefits of RTTs and have managed to overcome existing market barriers. Let’s elevate RTTs from sidekicks to heroes in the renewable energy revolution.


[1] Sanstad, A., Hanemann, W., Auffhammer, M., End-use Energy Efficiency in a “Post-Carbon” California Economy: Policy Issues and Research Frontiers. Berkeley, CA: California Climate Change Center

Photo credit Mark Group