This article is from the April 2016 issue of Strategies, AESP’s exclusive magazine for members. To receive Strategies, please consider joining AESP.
Moving to the Middle – How to Navigate the Ins and Outs of C&I Midstream Programs
By Dave Backen, Christopher Burmester and Mary Ann Sheehan
Upstream. Midstream. Downstream. What’s the difference in a Commercial & Industrial energy efficiency program?
Or is there any difference at all?
While program implementers use these terms in various instant rebate programs, that use isn’t always clear, and many use upstream/midstream interchangeably, which can cause confusion in the industry.
For the purpose of this article, then, we will use the following definitions:
- Upstream program – In the supply distribution chain, incentives are paid/directed at the manufacturer level, which typically passes along a “reduced price” or enhanced support or availability for premium products to the distributor:
- Typical market actors include manufacturers and suppliers.
- Midstream program – In the supply distribution chain, incentives are paid/directed to the distributor level, with impacts typically passed along to the contractor or downstream self-install customer:
- Typical market actors include distributors, retailers and other vendors positioned between the manufacturer and the customer/end user.
- Downstream program – In the supply distribution chain, program promotion focus and incentives are paid to the utility customer (sometimes an incentive can be signed over to the contractor):
- Typically, the focus is the utility customer, although contractors/installers are often involved in installing the equipment or measure(s).
In this installment, we examine the benefits from and challenges to implementing C&I midstream programs as part of an energy efficiency portfolio.
While any product or measure could be delivered through a midstream or upstream channel, those typically included are:
- Lighting, which can include LED bulbs and fixtures, CFLs, linear fluorescents and ballasts, streetlights, and commercial display signs;
- HVAC measures including package units, heat pumps, room AC, split systems, and chillers;
- Motors and variable frequency drives;
- Gas measures that include boilers, water heating, and food service.
Due to the success of midstream programs, more products are being continually piloted and added in other end-use categories.
Midstream Program Myths – Fact or Fiction?
This section discusses some of the facts behind some myths that have appeared in discussions about upstream and midstream programs.
- Midstream programs are less expensive than their downstream counterparts
While this is typically the case for midstream programs, there can be instances in which they may not be less expensive. It all depends on the strength of the existing supply chain infrastructure and how the implementer delivers the program/savings. A cost effective midstream program does eliminate the more costly mass market outreach, application processing, review, reservation, and documentation standard processes for most custom or prescriptive downstream programs. However, it adds some cost and unique requirements as discussed below.
- Incentives always are passed on to the customer/end-user
Many programs dictate this as a requirement, but it is not consistent across the country. Some programs feel that allowing distributors to retain part or all of the incentive “pays them” for stocking, processing and promoting midstream products and allows the market to effectively allocate the incentive to move premium efficient products to the market.
- Midstream market actors have access to information on downstream customers
Customer data is guarded tightly by utilities in their efficiency programs. Sales data is also usually guarded by distributors and manufacturers, and upstream market actors may have no direct connection to the downstream customer data.
- Manufacturers and distributors decide what products enter the distribution chain
It could be argued that manufacturers and distributors always dictate which products they offer in the market. With that said, distributors work with manufacturers to obtain special pricing for volume purchases, which is really how the market works. Programs will choose what products/measures they want to incent in order to influence the supply chain and stocking practices. Many programs review product coverage as part of the distributor qualification process to ensure customers will have selection and coverage for all products that qualify for the incentive.
- Double-dipping (multiple incentives paid for same measure/customer) between upstream and downstream programs is bad
Launching a midstream program involves entering another distribution channel in the marketplace, and yes, it is a possibility that some up-market purchases have already had a downstream incentive applied (or vice-versa). Regardless of the distribution channel, programs target distinct market barriers, so having both programs operating in the same supply chain maximizes coverage of the market. Program design rules, cost-effectiveness calculations and program attribution estimates account for forecasted and actual “double dipping.” This type of advance planning can mitigate the risk of running both up-market and downstream intervention strategies.
- Actual measure installation rates are not high.
While this may be the case in some areas of the country, the programs with which we have had experience are finding very high installation rates. Non-lighting measures are generally purchased at a time when they are needed for immediate use, so the installation rates are expected to be close to 100 percent. However, in some cases, (motors for example) the purchase may be to restock a warehoused measure that was pulled for immediate use.
Benefits of Midstream Program Implementation
Midstream strategies are well-suited for interventions that aim for broad-based and rapid market transformation goals. As a product moves from the manufacturer through the market chain to distributor, contractor, retailer, and eventually the downstream customer, both the number of participants and the cost of the product increases as each market actor adds its transaction costs and sells the product to its customers.
- Broader Market Engagement with Fewer Program Participants
As you move up the product distribution chain, the number of market actors at each level decreases, making it more cost effective to impact a larger percentage of the entire market. In one commercial and industrial HVAC program, while there were more than 300,000 eligible downstream customers, the market was served by approximately 500 contractors and 20 distributors of qualifying equipment. In this example, shifting the market outreach focus from downstream customers to contractors decreases participants by more than three orders of magnitude. Moving further up to distributors decreases number of potential participants by yet another order of magnitude. Targeting outreach to midstream market actors makes it possible for an incentive program to more cost-effectively influence the market.
- Greater Incentive Leverage
As each market actor adds its transaction costs, the price of the product increases as it moves downstream. By directing an incentive to upstream market actors, the same incentive can have a much greater influence on the preference and pricing of a product, while making more efficient products price-competitive with their non-efficient alternatives. Experience has shown that in some programs, providing $1 of incentives to the distributor would require a $2.50 incentive at the retail level to result in an equivalent price impact to the customer. A key requirement in a successful midstream program is that the incentive covers a minimum of 80 percent of the incremental measure cost (IMC). This has been found in multiple programs to be necessary to motivate midstream market actors to stock, promote, and sell premium efficient equipment
- Greater Flexibility and Forecasting
As a midstream program begins to gain traction, program savings grow, along with the budget requirements of the program. When the distribution community becomes fully engaged in a midstream offer, a large portion of the program goal can be achieved at a relatively low cost. Planning in advance will allow a focus on targeted non-lighting measures and provide opportunities to pilot more advanced technologies. By specifying qualifying measures and incorporating strong program rules for distributors, forecasting program savings can be more accurate than in traditional programs in which customer reservations can result in a high percentage of cancellations, especially at the end of a program year.
- Product Upselling with Trade Allies
The trade allies who operate as midstream market actors are trained in the sale and distribution of the product. Unlike the typical downstream customer, these contractors have a sophisticated understanding of the market, strong personal knowledge or access to technical information, training in the sale and delivery of equipment, and are highly motivated to increase product sales. Successful midstream programs leverage this expertise to build a relationship of understanding and trust to motivate trade allies to stock and upsell premium efficient equipment.
- Serving Replace-on-Burnout Market
By establishing a required stocking level for high-efficiency equipment, up- and midstream programs solve the classic replace-on-burnout (ROB) issue. Replace-on-burnout, over the 2007-2011 period, was estimated to be more than 70 percent of unit sales. For a unit in high demand, such as HVAC, motors used for industrial processes, or other equipment supplying critical services, waiting up to three weeks for a premium efficient unit that is not in stock often is an insurmountable barrier in terms of lost business capacity or customer comfort. By establishing stocking levels and the promotion of premium efficient units, midstream programs eliminate the significant hassle factor associated with shipping delays. Midstream programs, because they do influence stocking, thereby address the ROB market and such programs are able to reduce lost opportunities because high energy efficiency products are stocked and ready for delivery.
This article is from the May 2016 issue of Strategies, AESP’s exclusive magazine for members. To receive Strategies, please consider joining AESP.
Moving to the Middle — How to Navigate the Ins and Outs of C&I Midstream Programs (Part II)
Part II: The Challenges of C&I Midstream Programs
Upstream. Midstream. Downstream.
In the first installment, we provided the definitions and distinction of these terms – and the myths and benefits surrounding their implementation. But what about the challenges programs face when trying to incorporate these ideas into a larger energy efficiency portfolio?
With any midstream program comes many implementation, regulatory, and administration counterpoint challenges that must be overcome with careful planning. Some programs have launched C&I midstream programs mirroring their successful residential retail program only to learn that participation barriers for distributors are much different than the issues faced at retail, which largely revolve around customer-facing signage and displays.
- Ability to Broadly Influence Stocking
Stocking decisions are made primarily at the upper end of the distribution chain, with distributors and retailers overwhelmingly influencing what products compete for scarce shelf or warehouse space. Stocking decisions are made on a quarterly, seasonal, or annual basis, based on what has sold or is expected to sell in the coming time period. Businesses succeed or fail on their stocking decisions, and those decisions are made based on an expectation of both bottom-line profit and driving top-line sales revenues. Changing stocking practices often initially involves risk, but that initial risk can be offset by organizations that offer a clear incentive that the market actor is free to leverage in whatever way works to move the product. These incentives are typically used for additional sales force training, sales incentives, and other costs to initially move the high-efficiency product. Later, as sales are established and competition increases, experience with existing programs demonstrates that the incentive is increasingly moved into the market in the form of price reductions.
- Extensive Market Outreach and Engagement
Downstream programs typically have a single transaction with a large number of individual customers. Midstream programs typically have a high number of transactions with a small number of market actors over the entire duration of the program and, as such, you form a much deeper and ongoing business relationship with these trade allies. The market outreach relationship is therefore much more extensive than that of downstream promotion and outreach, requiring regular in-person visits, detailed analysis of sales statistics and comparisons against industry, and other market actor performance in the program – and a willingness to deeply understand the trade ally’s business requirements and perspectives.
- Automated, Paperless Application Processing
Because successful midstream programs typically involve a greater number of transactions by an order of magnitude, end-to-end automation and paperless application processing is an absolute requirement. Early midstream programs piloted in the 1990s by California IOUs found that distributors simply refused to participate if the hassle factor with tracking and submitting applications was too great: the opportunity cost for the sales staff for midstream market actors was too great. As a result, the program implementers must use a system that fully automates all aspects of application processing and provide market actors with interactive dashboards to rapidly process and address issues with applications, payment tracking, and streamlined reporting.
- Timely and Reliable Incentive Payments
Timely, regular, and reliable payment is also vital to program performance. Cash flow is a great motivator to any business person. By paying incentives in less than two weeks from the submission of applications, the program ends up speeding up the delivery of profit to the trade ally, as the incentive often represents the majority if not all of the profit margin on a transaction. Most trade allies typically operate on a net 60 or 90 credit terms with both their suppliers and their customers, so by participating in an incentive program, trade allies reduce their accounts receivables from net 60/90 to net 14 – or whatever the program reliably pays. This is a huge financial motivator to the market actor. However, in order for this benefit to be realized, the program must establish and maintain transparent program rules, rapid and automated processing, clear online reporting, and regularity in payment fulfillment to create trust and confidence with trade allies.
- Need for Program Stability
Because trust and certainty are central to building a relationship with the trade allies, program implementers must seek to insulate the trade allies from start/stop utility planning or regulatory cycles. Changes to the program must be communicated far in advance and should seek to recognize any planning or stocking cycles and seasonality inherent in the market distribution chain for the product. For example, in the business and consumer electronics industry, all manufacturing and purchasing decisions are aligned on an annual plan-and-buy cycle. The HVAC industry’s alignment is with summer and winter seasons. Having trade allies make stocking and purchasing decisions influenced by the presence of a program that is then abruptly changed or discontinued is a recipe for permanently damaging a relationship with a large segment of a product industry. Care must be taken to ensure that all decisions are made with those market considerations. Midstream programs are large-scale programs – like large scale base-load power plants – which do not lend themselves to rapid start and stop cycles. Implementers benefit from the momentum and scale of these programs but they require time and notice to change.
- Access to Utility Customer Information
Another challenge to upstream program implementation is access to utility customer information – such as the service address, correct service customer account name, and customer utility account information – to verify that the affected downstream customer is an eligible program participant. Point-of-Sale programs can gather some of this information, but most customers typically do not keep their utility account number with them at all times, so may not have it at the point of sale. In addition, distributors may “drop” ship to a location or provide a stocking shipment to a contractor warehouse, so will not know where the unit is ultimately placed. Some programs have investigated split incentives or coupons to be filled out by the contractor or end customers, but these universally have low participation and raise questions from the rest of the market not directly targeted by the incentive portion of the program. Solutions involving machine learning and automated address matching, statistical attribution of sales, and other approaches have been successful in building a case for utility program attribution of impacts, and are especially useful when operating a multi-utility territory program.
- Representing Value to the Downstream Customer
The loss of the ability to “give” incentive dollars to their customers is often a difficult change to accept for a utility charged with achieving high customer satisfaction; as a result, may struggle to represent the value of the midstream program to their downstream customers. Many different approaches can be taken to communicate this value, including post-sale direct-to-customer communications. These communications explain that the availability of the unit was made possible by the utility, together with the savings over the lifetime of the equipment that were not readily available without the program intervention.
- Regulatory and EM&V Barriers
There are also regulatory and EM&V barriers to consider and overcome. Many regulatory environments do not allow utilities to provide incentives to non-ratepayers or to anyone but direct utility customers. In these instances, a multi-year preparatory cycle on the part of the utility regulatory team may be needed to educate and influence regulatory bodies to the benefits of midstream market programs for utilities, customers, and the industry. Evaluators, long accustomed to the program theory behind downstream resource acquisition programs, may not understand the realities, objectives, and program theory behind a midstream market transformation program. In some historic cases, evaluators have naively contacted downstream customers to ask them if their purchase decision was influenced by the program – even though downstream customers typically have no direct knowledge or interaction with most midstream programs. Developing the program theory plan and reviewing it in detail with program evaluators in advance is a best practice, as is gathering intervention documentation and, when possible, full category sales data from market actors in order to establish changes in product mix over time as a result of program intervention.
This article is from the July 2016 issue of Strategies, AESP’s exclusive magazine for members. To receive Strategies, please consider joining AESP.
Moving to the Middle — How to Navigate the Ins and Outs of C&I Midstream Programs (Part III)
By Dave Backen, Christopher Burmester, David MacDonald and Mary Ann Sheehan
Part III: Examples from Midstream Programs in Practice
In the first two installments of our series on midstream programs, we had looked at program definitions and terminology, covered program myths and benefits, as well as looked at the challenges and barriers to midstream program adoption and success. In this final part, we illustrate some of the benefits and challenges through examples of successful utility midstream programs in lighting and HVAC.
Commonwealth Edison Company – Increasing Market Share of Energy Efficient Products
Commonwealth Edison Company (ComEd) of Chicago was seeking a way to increase the market share of energy efficient products when it launched a midstream program in 2010, initially using a retail point of sale model and transitioning over time to a distributor model.
Many lighting products, particularly replacement lamps and fixtures are a transactional purchase lending them to a discount at the time of purchase. Since many commercial and industrial customers purchase these items through distributors and work with electrical contractors rather than retail outlets, a distributor-based midstream program offered a more effective method of targeting ComEd’s business customers. The distributor program was designed around the following parameters:
Since its launch the program has grown annually to provide a large part of the overall program savings and has 96 participating distributors with nearly 9,000 customers participating in the most recent program year. While starting out primarily as a lighting program, it has expanded to include other products such as battery chargers and transformers, and the program design allows the addition of new measures in the future. In addition to increasing participation the program has seen additional benefits including:
- High volume products to drive increase in market share
- Well-known products (mix of standard, specialty, high-wattage and cold-cathode CFLs, LEDs, etc.) to ensure product acceptance
- Products with fixed savings allowing for ease in calculating savings
- A robust and reliable base of cost-effective energy savings
- Increased control over energy efficient product specifications and quality which provided an enhanced customer experience with new technology/products in rapidly evolving markets
- Reduced paperwork, easing program participation
Number of Measures Installed by Type
Source: ComEd BILD PY7 Evaluation Report
Lastly, the midstream program provides ComEd a platform to promote the overall program to more people. Many contractors were unaware of the program until receiving the discount at the distributor. These contractors have now become more involved in the core program, becoming trade allies and increasing trade ally participation in other program offers.
Xcel Energy of Colorado – Thoughtfully Moving Midstream
In 2013, the Colorado Public Service Commission (PSC) instructed the state’s utilities to increase efficiency savings by 30 percent. At the time, Xcel Energy of Colorado’s Downstream Commercial HVAC program was providing incentives for a nominal number of tons of premium efficient HVAC equipment each year. However, information provided by one distributor – one of the major regional distributors in its territory – on the sale of high efficiency equipment in the region indicated that the downstream program was only reaching a very small fraction of total sales. A significant and overwhelming majority of sales were code-minimum units. Moreover, more than a third of units sold were “reactive” sales” – sales in response to units that have failed in service – where the owner will seek to replace the unit immediately. As these units were not currently maintained in stock, this entire fraction of the market was unserved by the program.
Xcel Energy’s Commercial Midstream Cooling (HVAC) Program Manager, who was seeking new program delivery models that could better serve the demand for high efficiency HVAC in the region, reviewed successful program implementation models nationwide, and invited experienced midstream program implementers to share best practices and information. One of the primary concerns for both Xcel Energy and PSC personnel with migrating to a midstream delivery model was that ratepayers would not benefit directly from the program as the incentive dollars would flow to distributors to support the stocking and upselling of premium efficient equipment. However, as was shared via the figure below and discussed in meetings at Xcel Energy, the typical downstream incentive amount is only a small fraction of the lifetime savings achieved from premium efficient HVAC equipment and the majority benefit from these units are in the energy saved over the lifetime of the measure – not the initial incentive.
Lifecycle Savings from a 5-ton, 3-phase Commercial Air Conditioner
Assumes base unit SEER 9, 30 percent efficiency loss, new unit SEER 17, 1,100 operating hours, $0.14/kwh, average measure life of 20 years. HVAC rebates assume average of $200/ton. Source: Energy Solutions.
By moving the program midstream, the program had the opportunity to increase claimable energy savings up to 10 times though greater market coverage, thus providing significant lifetime benefits to many more ratepayers. All the customers who are not replacing their units with efficient units represented a huge lost opportunity – for the customer, the utility, and the environment. This perspective was more than enough to allay concerns and build support amongst Xcel Energy and regulatory personnel for a midstream program approach.
Xcel Energy filed for regulatory approval to move their Commercial HVAC program to a distributor program model and in mid-2015 launched its midstream HVAC program. In its first year, the program is on track to approximately triple the volume of its previous downstream program performance. And the program is just getting started; with program model refinements, the program is expected to continue to exceed this performance in the second year.
Xcel Energy’s path to moving to a midstream program is a superb example of a planned and coordinated move – with regulatory involvement, support, and buy-in – to leverage existing best practices and lessons learned from other utility programs to launch a high performing midstream program and achieve greater impacts and benefits for its customers.
In our three-part look at midstream programs, some of the key takeaways include:
- Properly Implemented, Midstream Programs Allow Entire Market Coverage – By engaging with the market actors who serve the entire market, a properly designed program can cost-effectively influence nearly every sale of a class of technology in your service territory.
- Respect and Engage Market Actors – Every market is different, and the key successful market actors in your territory understand the market best. Engage with them, listen, and include them in your program design.
- Leverage Existing Lessons Learned – While upstream approaches are new in many areas of the country, select utilities and implementers have been running upstream programs for decades. Seek out and leverage information and lessons learned in creating your program.
- Keep the Program and Process Simple – Your market actors are busy and upstream programs have much greater volume than downstream programs. True end-to-end automation and on-line processing of administrative processes are key.
- Regulatory Change is Possible - As many states seek to introduce higher savings goals, regulatory agencies are receptive to regulatory changes to allow innovative program design strategies that provide larger and more cost-effective savings. Familiarize your regulatory personnel with upstream approaches by sharing information and success stories from other regions; share the significant benefits and how concerns about upstream strategies have been addressed elsewhere.