Moving to the Middle. How to Navigate the Ins and Outs of C&I Midstream Programs
This article originally appeared in the April 2016 issue of Strategies, the monthly magazine of the Association of Energy Services Professionals (AESP.ORG).
Dave Backen, Director, Evergreen Consulting Group
Christopher Burmester, PhD, Vice President, Energy Solutions
Mary Ann Sheehan, Service Line Lead, DNV GL
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%. 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 end 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% 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% 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.
Dave Backen is the Director of Evergreen Consulting Group; Christopher Burmester is the Vice President of Energy Solutions; and Mary Ann Sheehan is the Service Line Lead at DNV GL and vice chair of the AESP Implementation Topic Committee. This article is contributed by the Implementation Topic Committee.
Learn more about DNV GL’s Midstream program.