Efficiency Valuation: Concepts and Practice

Steve KromerEfficiency Valuation Organization

Taipei, TaiwanOctober 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 DevelopmentThe 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 DevelopmentThe Big Divide

Services - or - PowerWhat’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 DevelopmentThe 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-SideGenerationTransmissionDistribution

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-SideGenerationTransmissionDistribution

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-SideGenerationTransmissionDistribution

Efficiency Demand Response

•T -8s•New Chiller•Boilers•Plant Improvements•Controls•High Efficiency Motors

18

EXAMPLE: California 2006-2008 Energy Efficiency Programs

Demand-Side

InvestmentInvestment

$2.0 Billion$2.0 Billion

Supply-SideGenerationTransmissionDistribution

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

500,000

750,000

1,000,000

kWh

Baseline Period Performance Period

WWHH meter

Watt-hour MeterWatt-hour Meter

What Would Have Happened MeterWhat 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

500,000

750,000

1,000,000

kWh

Baseline Period Performance Period

WWHH meter

Watt-hour MeterWatt-hour Meter

What Would Have Happened MeterWhat 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:– Sampling– logging– taking snapshots･– testing

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 Option How 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– http://ecalc.tamu.edu/gui/home/

• Metrix, Utility Manager Pro 4.0 (commerical software)– http://www.abraxasenergy.com/

• EZ Sim Stellar Process– http://ezsim.com

• 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

Before After# or Fixtures Watts Watts Hours/yr Savings

100 100.0 50.0 3000 = 15,000 kWh200 100.0 50.0 2000 = 20,000 kWh300 100.0 50.0 1000 = 15,000 kWh

= 50,000 kWh

Lighting Retrofit

Inputs to model are based on measured data, past experiences, and facility interviews

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

Variable Speed Drive Fan Power

0

50

100

150

1-Jul-97 6-Jul-97 11-Jul-97 16-Jul-97 21-Jul-97 26-Jul-97 31-Jul-97

VS

D F

an k

W

0

30

60

90

120

Tem

pera

ture

, F

Baseline

Post-retrofit

Air Temperature

baseline fan power

savings

gap in data collection

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-2J.J. Hirsch & Associates http://www.doe2.com/

• eQuestEnergy Design Resources http://www.doe2.com/

• PowerDOEJ.J. Hirsch & Associates http://www.doe2.com/

• EnergyPlusLBNL & DOE http://gundog.lbl.gov

• Visual DOE 4.0Eley Associates http://www.archenergy.com/

• Trace 700Trane http://www.trane.com/commercial/software/trace/index.asp

• Market ManagerOptimum Energy http://www.abraxasenergy.com

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

A B C D

Assess retrofits individually x x x

Assess facility only x x Savings <10% of utility meter’s energy x x x

Multiple energy conservation measures x x x

Industrial processes x x x

70

Selecting an Option - 2

A B C D Significance of variables is unclear x x x

Interactive effects are significant or not measurable

x x

Expect many future changes within the measurement boundary

x x

Long term assessment needed x x

No baseyear energy data x

71

Selecting - 3

A B C D Need non-technical people to understand the meaning of savings reports

x x x

Have metering skill and experience x x

Have simulation skill and experience x

Have utility bill reading skill x

72

M&V Requires TWO Meters

250,000

500,000

750,000

1,000,000

kWh

Baseline Period Performance Period

WWHH meter

Watt-hour MeterWatt-hour Meter

What Would Have Happened MeterWhat 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 International Energy Efficiency FinancingFinancing Protocol 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, USA Vice 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:www.efficiencyvaluation.org

Download IPMVP Volumes:www.ipmvp.org

Contact me:Steve Kromer, Chair, EVO Board of Directors:

stevek@efficiencyvaluation.org