Posted by Charley Cormany, EFCA Executive Director
It’s a common practice to try to encourage or change behavior with incentives. Parents do it all the time. Have you ever agreed to do something for the reward that was promised upon completion? Finished your dinner so you could have ice cream? Or as Pink Floyd famously sang “how can you have any pudding if you don’t eat yer meat?”
Incentives are not foolproof
The problem with incentives is that if you get them wrong, you won’t get the result you’re looking for, and you might even encourage behaviors that are counterproductive, costing you time and energy. Even worse is when someone gets too dependent on an incentive the motivation disappears. Ever had a dog that only behaved if you gave them a treat? Parents do this with their kids, inadvertently teaching them that the only reason for doing something is an external reward. In the marketplace, over-reliance on incentives can be just as bad as it can encourage unsustainable business models that collapse when the incentives change or disappear.
It’s no secret that incentives play a big part in the home performance industry. It makes sense: incentivize folks to do more complete work by letting them share in the reward. But although incentives have been used successfully for decades across a wide range of industries, sometimes the results don’t match the intended goal. An example of one of these “misaligned incentives” would be asking a sub-contractor who bills by the hour to automate part of their process. While automation saves time overall and increases efficiency, it decreases total billable hours and hurts the contractors’ bottom line. Why would the contractor be encouraged to do the work faster? In order to make less money?
Energy Upgrade California incentives have been challenging
California’s Energy Upgrade California program has struggled to align incentives from its inception. Originally the program had two paths, Basic and Advanced. The basic path was simple and had limited incentives–at the time $1,500. The advanced path was complicated and time consuming but offered bigger rewards–up to $3,500. The concept was based on the idea that contractors could start with the Basic path simple jobs. As they built up their business, they would step up to the advanced path and have more incentives available.
The problem was that to get any incentive, contractors were required to get special training and certifications in order to participate (BPI). In many cases they had to obtain another contractor’s license too. The program required contractors to have a General “B” license, as this is the only license category in California that allows contractors to hire sub-contractors. They also needed to provide insurance certificates naming the program as a loss payee–yet another cost of participation. In many cases they invested in expensive testing equipment too. All of these requirements created a significant financial burden.
So, in order to recoup their costs, most contractors skipped basic and went full-on into the advanced path. This allowed them to get larger incentives for their clients and do bigger and more profitable jobs.
This threw a curve ball at the program folks, who had projected program costs based on 80 percent of the jobs being basic jobs. As you might imagine, the cost to process an advanced path project was higher than for basic, not to mention the incentive pay-outs. Program metrics such as job volume, cost per job for administration, quality assurance and quality control, were all based on the assumption that contractors would do a whole bunch of basic jobs and a few advanced path jobs. From a program perspective, the unanticipated shift to advance path jobs was a logistic and financial disaster.
Determining incentives is a guessing game
This story highlights something most contractors don’t appreciate, which is the guessing game program administrators must play. Administrators need to make projections on job volume in order to predict savings and create budgets. If uptake is slow, they miss their projections and don’t deliver the savings they have promised. Conversely, if the program takes off like gangbusters, they face running out of funds.
Savings vs. volume
Another variable in this balancing act is program volume versus energy savings per job. In general you can either design a program to focus on deep energy retrofits and savings per job, or you can create an easier path that increases volume, with less savings per job. This is how the Home Upgrade path came to be. It was intended to be a replacement for the Basic path that would encourage greater contractor participation. It had less complicated requirements and was easier for contractors than the Advanced path. It worked: in 2016 Energy Upgrade California did around11,000 jobs, of which 9,000 were Home Upgrade and 2,000 were Advanced Home Upgrade.
So, if Home Upgrade was driving volume why did PG&E decided to kill it? The answer is misaligned incentives. The Home Upgrade path brought the volume the program administrators were looking for but it came at the cost of savings per job. In 2016 the average Home Upgrade job reported 9 percent savings. In that same period the average Advanced Home Upgrade job delivered 25 percent savings. It turns out if you’re only interested in volume, a prescriptive program that pre-determines savings for each measure is a good way to go. But if you’re looking to save as much energy as possible, a performance-based program, where you evaluate and qualify the measures for each house, is much more effective.
Clearly defined goals
So what should the goal of an energy efficiency retrofit incentive program be? Is it volume–to encourage as many contractors and homeowners to do retrofits to their homes as possible? Or is the goal to save as much energy per project as possible savings? Figuring out this balance is a key challenge for incentive programs.
While it might seem like getting as many people to participate as you can makes sense, programs that focus on volume can be bad for the industry. Picking the low hanging fruit is not always the best solution. There are a couple of ways to approach energy efficiency retrofits. You can do a basic job, which typically involves air sealing, insulation, and duct sealing. Or you can do more comprehensive jobs, often referred to as “deep energy retrofits”. These jobs address moisture, ventilation, correctly sized heating and cooling systems, properly sized duct systems, perhaps a new pool pump, and a smart thermostat too.
Personally, I think there is a real danger in doing limited scope, simple jobs. If one of these jobs doesn’t deliver the savings that promised, the entire industry is discredited.
Are phased projects the answer?
Many program designers are anxious about the cost of comprehensive proposals. To address this, they often suggest allowing homeowners to do a project in phases. In my experience, this is not a great idea. Home performance upgrades aren’t like kitchen or bathroom remodels that can be easily done one at a time, in stages. For home performance projects a phased approach can create real challenges.
Energy efficiency upgrades are complicated. For example, if you insulate the attic without air sealing first, you’ll have to remove or seriously disturb the insulation to air seal at a later date. The same holds true for ductwork in attics. If you replace your ducts but put off air sealing and insulating for later, when the time comes the insulation crews will have to work around or move your new ducts for access, often times causing damage to the new duct system. Want to add a whole house fan at a later stage? Now you need to tromp through the insulation over the new ducts without damaging either one, in a tight, hot attic. Good luck with that.
The home performance loading order
In theory, there are ways to make this process a little easier. The home performance industry promotes the idea of a “loading order” for comprehensive retrofits: for example do insulation and air sealing first, then control moisture, improve ventilation, install new duct work and properly sized heating and cooling systems, and so on. But this only solves part of the problem. In addition to the complications of doing things out of sequence, I think homeowners have limited attention spans and patience when comes to the expense and disruption of efficiency retrofits.
Personally, I don’t put a lot of credence in a “phased approach” to home performance retrofits. In my experience, most home owners want to invest in a home performance upgrade once and be done with it. Maybe you’ve have figured out a business model where this works. If so I would love to hear how you are doing it. In general, I have not seen this approach gain much traction.
Building your business on incentives is risky
Another problem with incentives is that contractors can put too much faith in them, relying on them to build their businesses from the ground up. But building your business based on incentives alone is risky. Many incentive programs are intended create market transformation. This means that you incentivize up front to get the ball rolling, and back off and let the market take over once participation has gotten to the point where people don’t need subsidies to be encouraged to get the work done.
What I have seen over the years is that incentives provide credibility, generate leads, and help contractors close deals. Special financing offers are helpful too. I think many program folks overestimate the value of incentives, after all who needs a discount on something you don’t even know you want to buy? Contractors also place a great deal of faith in these incentive programs too and get pretty vocal when they’re are changed or discontinued. The lesson to learn is, don’t count on incentives as the only means to grow your business. Programs will change, the incentive levels will drop. In fact, if we do our job right, they will eventually go away entirely.
What incentives are good for
Perhaps a more realistic expectation is for incentives to create consumer demand and generate leads. At the end of the day what really builds a successful business is high quality work and customer referrals.
High quality work with measureable results
To build a sustainable industry, contractors need to focus on doing high quality, effective jobs, with measurable results. Leverage your happy customers by using them for referrals and case studies. Testimonials and satisfied customers are what really build successful businesses. Use the incentives for what they are worth: lead generation, credibility, etc. But please realize that if you rely on incentives for survival, you have, in effect, made the program people your business partners, and that is a very dangerous proposition.
Use incentives to compliment a solid business plan
Build a solid business plan first, then use the incentives to compliment your plan. You should go into this knowing full well the incentives will change, so focus first and foremost on doing good work. Use measured results as much as you can to demonstrate success. Make sure to include customer referrals and case studies in your marketing efforts. In the end, quality work, measurable results, and happy customers will do more for the long-term success of your business than any incentive program.
Efficiency First California
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