How the success of demand response helps us unlock the much larger value of energy efficiency for industrial, commercial, and institutional customers
Imagine this: you're the president of a large manufacturer with dozens of plants. You get a phone call from a salesperson who says, "My product can save you 2% each year on the cost of janitorial supplies, which amount to 3% of your total cost of doing business. All you have to do is buy my software, hire a janitorial supplies expert to use that software, and you'll be able to find those savings." In your mind you chuckle, thinking you've heard the most unique sales pitch of all time, right before you say, "No thank you," and politely hang up the phone.
Now, consider this sales pitch, "You spend a lot on janitorial supplies each year. I have a rebate check for you today in the amount of $20,000 that I will pay you each year for allowing my company to manage that spend for you. It won't cost you anything to use my services, we take all the work off your hands, and there is no risk in taking advantage of this offer." In your mind you chuckle, thinking you've heard the most unique sales pitch of all time, right before you ask, "Why wouldn't I do this?"
This analogy highlights what works and what doesn't in energy management, and how we can solve the broader challenge of unlocking billions of dollars in savings that lie fallow because of a broken value proposition, specifically as it relates to energy efficiency. Two facts contrast the success of demand response, one of three major energy management tools, and the failure of energy efficiency in the context of this sales pitch:
- Fact 1: The commercial and industrial-focused (C&I) demand response industry saves its average customer 2% on their total electric bill and a typical electric bill amounts to 3% of the total cost of doing business for that customer (e.g., commercial office, university, retailer). Yet customers have signed up by the tens of thousands because we, the industry, made the value proposition a no-cost, no-risk, simple way to generate cash while eliminating any need on behalf of customers to be energy experts. It's estimated that the C&I-focused demand response industry potential is $5 billion annually and is about 40% penetrated in the US. We coined the phrase, "Selling five dollar bills for three dollars," because it's what we did. Unlocking demand response value was due to a commercial, not a technological, innovation.
- Fact 2: Energy efficiency savings, for these same types of customers, represent on average 10% net savings after paying for the investments required to get those savings. These savings include no-cost (e.g., turning lights off at night), low-cost (e.g., investing in metering to more closely monitor energy spend and tighten operational parameters like start-up and shut-down), and capex savings (e.g., lighting retrofit with a less than two year payback). It's estimated that the C&I-focused energy efficiency industry potential is $24 billion annually and about 1% penetrated in the US. Yet, dozens of companies have come and gone trying to sell customers on the notion that they should buy their software and services, hire energy experts, and treasure hunt for the savings that justify the investment. Despite the value to customers being 500% that offered through demand response, the industry has been an abject failure for customers and investors alike.
Demand response has brought to market more than 30,000 of the least expensive, most reliable, and cleanest MW's in the US in the past 10 years, delivering not only savings to those who participate in these markets but tens of billions of dollars in electric bill savings to all customers. Additionally, grid operators and utilities gained a tool to bolster grid reliability, preventing blackouts that would have had devastating impacts on our economy, health, and environment. Again, the reason is simple: we sold "five dollar bills for three dollars" by innovating a commercial value proposition that customers couldn't say no to. And this all happened by delivering 2% net savings to customers on 3% of their total cost of doing business.
"Energy efficiency delivers 500% the value of demand response to a C&I customer, yet less than 1% of C&I customers use software to find energy efficiency savings."
The energy intelligence software industry, on the other hand, has completely failed. Vendors ask the customer to purchase software-as-a-service on a recurring monthly basis by persuading the customer that by using their software they will find savings to justify the expense . . . and if they don't have an energy expert on staff they should hire one, or more, to use the software to find the savings (or rent a very expensive one from the energy intelligence software (services?) company. Some of these so-called software companies claim that it's not about just savings, it's about "value" by which they mean some combination of risk management, compliance fulfillment, team productivity improvements, carbon reduction, general do-goodery, etc. And it's true that good energy management software can and should provide these types of value. But those are trumped up value props, smoke and mirrors, to bolster what amounts to a complex, costly, risky value proposition that saves a relatively small amount off of the total cost structure for the typical customer.
Yet, there are truly significant savings associated with more intelligent energy management. You don't have to look far for third-party research (e.g., McKinsey, ACEEE, EPRI) that shows most large C&I end-users waste between 10% and 40% of the energy they pay for. Here's the rub: these savings are not easy to come by like the savings provided by the demand response value proposition. To get energy efficiency savings you need to be an energy expert, you need effective software analytics, you need the right data (e.g., real-time metering, energy bills, weather data), and you need an internal business case that justifies the investment in dollars, time, and staff . . . or you run the risk of souring your organization on the virtues of energy management.
"Energy intelligence software companies have all failed to succeed because they put cost, risk, and complexity on a customer who has a business to run. They fail to bring the right commercial value proposition to a customer who will gladly accept the value, but not the cost, risk, and complexity of the unknown."
Voltus turns the value proposition of capturing energy efficiency savings on its head just like we did in the demand response industry (which in February of 2016 was secured by the Supreme Court of the United States in its decision relating to FERC 745). We don't ask customers to buy software and services, hire energy experts, and take the risk of hunting for treasure in the dark. We do that work for them, just like we do in demand response.
We recognize that there is tremendous value in finding ways to use less energy to maintain and grow business productivity. We put our customer's needs first in delivering that value by installing and using our own technology, at our expense, to uncover no-cost, low-cost, and capex energy savings opportunities. We're energy experts and we want to align our interests around the value we find and share. When a customer decides to implement what we've found, we get a piece of that value stream . . . but only if the customer decides to implement it. No implementation, no sharing of value. Voltus incurs 100% of the cost, takes 100% of the risk, and eliminates the complexity of capturing the value.
You may think, "Well, isn't this a performance contract?" No, not at all! Performance contracts put very tight controls on what a customer is required to do when the energy services provider recommends savings measures. Performance contracts are long-term, 30+ page legal headaches for customers that more often than not pit the customer against the provider in proving the validity of achieved savings. Just like with demand response, Voltus doesn't require a customer to act, so to speak. We simply expect that you will because if you don't then you lose the value of the savings. It's a carrot (and more importantly, a purpose), not a stick.
If you've wanted to reap the benefits of energy efficiency for your business but you've been challenged by internal barriers to purchasing energy-related metering, software, services, or the like, then connect with us (email@example.com). The only question you need to answer is, "Why wouldn't I do this?"