Energy Efficiency Has Many Metrics but Only One Set of Books

March 28, 2018

There is a common trope in energy efficiency that equates the use of different metrics for energy savings with "keeping multiple sets of books."  The clear implication is that any number other than what comes out of third party EM&V is akin to some sort of criminal enterprise or money laundering.

While the pursuit of a “unified field theory” of energy efficiency is noble and elegant, in reality different parties to energy efficiency benefit from different forms of value that require different metrics. A homeowner saves on their own bills in the form of lower usage at the meter and a lower bill, while the utility experiences an impact that is net of the forecast, which may already be counting on some of the savings.

Individual buildings and savings from projects always function in terms of gross savings, while forecasts and regulators are interested in population-level changes to demand that are expressed in terms of net impact.  Both are correct for different parties.

This does not constitute different books.

Instead, just like with real “books”, there are many different metrics that describe results that are pertinent for each part of the business. In accounting, it is the combination of standard and transparent accounting practice that can be audited that results in a single set of books all parties can have confidence in.

In fact, energy efficiency measurement practices operate in the same basic way that standard account practices work for businesses (this is not a direct analogy, but close!).

It starts with unit economics on a product or business line, in the form of gross savings and gross profits. You then adjust for overhead costs to arrive at EBITDA; then you add depreciation and amortization to get EBIT; then you calculate the cost of capital and finally arrive at Net Income.

Different metrics apply to different parts of the business.

You judge a product based on its gross profit unit economics first. A product manager would generally have the bulk of their bonus tied to this metric. The analogy here is to a contractor or building owner’s site-level savings.

However, if you’re the VP of a business unit of a company, you would be mostly judged on EBITDA for your division. This is similar to how utilities or program administrators would look at their performance.

Finally, if you are the board of directors, you are focused on net income, which is the bottom line profit for investors. This is similar to a regulator looking after the return on ratepayer investment.

Different stakeholders and market participants need the correct metrics to describe their part of energy efficiency. Accounting for all of these metrics together doesn’t constitute keeping multiple sets of books. In fact, this is precisely how “books” and account practices work.

Instead of worrying about multiple sets of books, what efficiency needs is a common set of weights and measures that can express the many metrics that drive different parties. As long as these weights and measures are based on open, transparent, and auditable rules agreed to by all parties in advance, everyone can know where they stand and each stakeholder will be empowered to use the right metric for the right task to move us forward on our energy and climate goals.

Read more on this topic:

One Size Does Not Fit All: M&V, EEMetering, and EM&V

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