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Aligning Incentives with Savings for Cost-effective Residential New Construction Programs

By January 26, 2015No Comments

 Aligning Incentives with Savings for Cost-Effective Residential New Construction Programs

Michael Turns, Performance Systems Development, Philadelphia, Pa.
Kathleen Greely, Performance Systems Development, Meadville, Pa.
Scott von Kleeck, Performance Systems Development, Philadelphia, Pa.


Download the Paper Presented at the 2015 AESP Conference 
Aligning Incentives with Savings for Cost-effective Residential New Construction Programs



This study examines the relationship between predicted energy savings and the HERS Index – a metric often used as the primary determinant of residential new construction (RNC) program incentive levels – and helps program administrators understand how aligning incentives with savings increases the accuracy of predicted savings and improves cost-effectiveness. This study found that the correlation between HERS Index and savings is relatively weak, suggesting that program administrators that reward lower HERS Indexes have incentive structures that are misaligned with the desired outcome. The homes examined in this study were participants in the RNC program of a Midwest electric utility company in 2013 and 2014. Using a data set of over 1000 new homes, the authors performed a regression analysis comparing the relationship of the HERS Index to predicted energy savings. This relationship between HERS Index and predicted savings was determined separately for electric and gas savings. Given the weak correlation between HERS Index and savings, performance-based incentives that reward savings, rather than HERS index values, are likely to result in a more efficient use of program resources and yield a more cost-effective program.



It is a widespread practice for utility programs to use the HERS Index as the primary determinant for program eligibility and incentive levels, but this may not be the best way to encourage builders to strive for deeper savings. The HERS Index has many advantages as a marketing tool: it’s simple, widely understood by homebuyers and builders, and easily communicated in sales materials. However, because a 1,000 square foot cottage and a 6,000 square foot mansion can have the same HERS Index, and the Index is independent of fuel type, the HERS Index does not give specific insight into the electricity or gas savings from a given home. The HERS Index is a useful tool for potential homebuyers to broadly assess their choices, but it is not tied to an absolute savings amount.

Alternative program designs that directly reward savings rather than HERS Index may provide better alignment between incentives and claimed savings, allowing utilities to operate more cost-effective programs. Performance-based incentives can be designed to reward builders for each incremental unit of energy saved (e.g., base incentive plus $0.10/kWh). Performance-based incentives also encourage savings within incentive tiers. For example, with an incentive tier of HERS 61-70 there is no incentive to drive the HERS Index down below a 70 unless the builder can achieve an index of 60, but with performance-based incentives there is always an incentive to save more.