Peter F. Hoffman, C.E.M., LEED AP, Zondits guest, 10/30/2023
This article has been amended from a version previously published on LinkedIn: Demand-Side Resiliency leading to risk mitigation and reduced insurance costs under a traditional Energy Efficiency programmatic framework
Utilities invest significantly in the resilience of the electrical and natural gas transmission and distribution systems in order to mitigate the risk of failures in extreme circumstances. On the other side of the meter, there has historically been little activity on the part of energy consumers to reduce risks beyond what has been mandated by code.
Demand-Side Resiliency (DSR) refers to any programmatic activity on the part of utilities that encourages measures which mitigate a building’s risk of damage during unlikely and extreme weather events, reduces recovery time after events, and/or enables continuous functionality during events.
Recent increases in extreme weather events suggest that it would be beneficial for utilities to apply successful energy efficiency frameworks to incent resiliency measures through programmatic activity.
As our climate changes, we have already seen increased damage during extreme weather events, and insurance companies have begun to react. Companies such as John’s Insurance, Southern Fidelity, and even Progressive are leaving states like Florida because state reinsurance funds are proving to be inadequate to meet insurance needs.
Efforts to reduce risks to buildings may not be properly valued, and utilities, building owners, and insurance companies would benefit from incentive programs similar to energy efficiency programs that have been developed over the past 20 years.
In the world of energy efficiency programs, there have been two philosophies driving change.
- Market Transformation is an approach that involves promoting new technologies and products until manufacturing and distribution can reach scale, costs come down, and consumers consider the new, more efficient products to be the default choice. LED technology is a classic example of this; in 2012 an A-19 style LED cost as much as $50 per lamp, but this technology has come down in cost dramatically while maintaining a high degree of quality. Without incentives, the nascent market would have not been able to ramp up. Today, very few consumers are interested in lighting technology that doesn’t involve LEDs.
- Resource Acquisition is a strategy that reduces the costs of familiar technologies, such as fiberglass insulation, which are already manufactured and distributed at scale but do not produce enough energy savings to be universally considered a strong investment.
Regardless of the philosophy being utilized, energy efficiency frameworks judge the value of energy efficiency measures based on their ability to provide energy usage reductions, and therefore cost reductions and environmental benefits. Building resiliency can be looked at in a similar way – measures that reduce risks could lead to reduced insurance premiums. When the risk reductions are clearly defined, the cost reduction to insurance companies can be identified and some of those savings could be passed along to consumers through reduced premiums.
For decades, actuarial science has developed methodologies for defining risk reductions that could be applied to resiliency measures. Most resiliency measures would fall into the “resource acquisition” category, such as cool roofing, insulation, siding, and green infrastructure. These measures have existed for a long time, meaning data may already be available or easily attainable via surveys for a large number of measures. More recently developed measures, such as insulated metal panels or advanced variable refrigerant flow systems, may need further data collection and time to be accurately evaluated but may have resiliency benefits that warrant market transformation programs.
What kinds of values could be clearly applied to Demand-Side Resiliency? We can define some of the potential value areas of DSR with examples.
- Passive Functionality, sometimes referred to as passive survivability, refers to how long a space can be utilized before extreme climate-related weather events make it necessary to vacate a building.
- Redundancy involves having back-ups for existing systems. Whole-home battery backups can reduce risks for homeowners during severe storms, keeping families comfortable and protecting refrigerated and frozen foods.
- Hardening of existing systems makes them resistant to damage. An example would be a heat pump condenser (outdoor unit) being elevated a few feet above the ground level. For indoor heating systems in basements, elevating units would also reduce the risk of flood damage to expensive components while keeping building occupants at a comfortable temperature.
- Fuel Diversity continues to be an important consideration as international conflicts continue to call attention to the fact that fuel prices are strongly influenced by forces that can act suddenly and are outside of our ability to accurately forecast. Using solar thermal and solar electricity systems can reduce the financial impact of unforeseeable circumstances.
- Business Continuity refers to measures that enable business to continue, even under extreme circumstances. Building resiliency measures can help businesses reopen quickly following storm damage.
- Community Benefits are comprised of any measures that help a community handle an event and recover quickly. Innovative systems, such as supercooling paints combined with solar and battery backups capable of islanding, may always be too expensive for most consumers. Community centers that can serve many people could leverage these technologies to provide a safe haven for community members during heat waves that may immediately follow powerful storms.
Most of these resiliency measures are nothing new, and climate adaptation has been a talking point for years, so a question inevitably comes up: why are resiliency programs not widely implemented?
- Utilities have a mandate to manage customer costs, provide safe reliable service, promote efficiency, and meet carbon reduction goals. Balancing these existing objectives is challenging, and earnings or cost recovery opportunities would have to be accepted by regulatory bodies in order to make Demand-Side Resiliency fundable.
- Insurance companies have the best data and experts in this area, and these companies do not have historical experience with energy efficiency incentive program frameworks. Partnerships and sharing of expertise would be effective in bringing utilities up to speed with the actuarial expertise of insurance companies, much like how collaborating with experts in the transportation field have aided utilities in the development of their electric vehicle programs.
- Unlike energy savings, reducing risks will not necessarily reduce costs for consumers on an individual level against a counterfactual scenario. Partnerships with insurance companies would be necessary to properly deliver value to building owners, but not entirely necessary if systemic benefits could be shown that lead insurance companies to reduce premiums for entire geographic areas. At a minimum, risks associated with reduced competition from insurance companies leaving high-risk states could be avoided. In addition, non-monetary but valuable benefits like reduced carbon emissions, improved comfort, and improved physical safety would be realized.
- Historic redlining practices have led to diverse communities being disproportionately affected by changes in climate. Communities with a high percentage of low to moderate income (LMI) families are also disproportionately affected because of challenges and costs related to relocating to less susceptible areas. Though we have seen changes in recent years, these communities often lack the political power to push for initiatives like DSR that would reduce their risks and make their communities better places to live.
What would be required to move Demand-Side Resiliency forward?
- There would need to be an increased awareness on the part of government regulators that this initiative would be valued by the communities they serve.
- Partnerships between utility-based energy efficiency portfolios and large insurance companies that would (at a minimum) involve information exchanges and ideally formalized business partnerships.
- Establishment of best practices, and a core knowledge base to successfully implement measures and instill confidence in all stakeholders and decision makers.