Policymakers take note: energy efficiency may be your best economic development strategy.

A recent report commissioned by the Northwest Energy Efficiency Council (NEEC) found that energy efficiency investments boosted the economies of Washington and Oregon by hundreds of millions of dollars more than if that money had been invested elsewhere. Not only does spending on energy efficiency generally remain localized, it also frees up capital that can be redirected towards other projects. Places that encourage investment in energy efficiency can then reap the long-term benefits of a stronger local economy, higher wages and lower unemployment.

We need a mix of market based tools to promote investments in energy efficiency. Here are three innovations that encourage broader adoption of efficiency and stimulate deeper, more persistent energy savings.

Performance-based outcomes

Owners and developers of new buildings should be able to trust that their building will live up to their design expectations. There should be no question about how efficiently the building operates once everyone moves in; it should be a matter of certainty.

Similarly, on the policy front, policymakers should know that their incentives for sustainable construction actually create buildings that perform as expected.

One way to do this is to align a team to focus on the whole – rather than the part they are directly responsible for – through performance guarantees. Performance guarantees create a market incentive for the designers, builders, operators and tenants to collaborate throughout a project to ensure that building actually runs as it is designed to.

Measurement and verification of energy savings is a common accountability measure for energy efficiency retrofits. However, many public agencies are beginning to enforce performance guarantees for certain new construction projects as well.

For example, The City of Seattle has instituted performance standards into their Deep Green Pilot Program, which allows code exemptions for projects that meet rigorous sustainability standards. Failure to meet the energy and water conservation guarantees and the entire project team is on the hook for a stiff financial penalty.

Stone34, the first project to go through the program, is currently wrapping up the one-year “performance period” that will determine if the building has actually met its energy and water targets.

Energy benchmarking

The majority of the buildings that will make up the cities of the future already stand. How can we better manage energy in the already-built environment?

Over a dozen cities nationwide have instituted “energy benchmarking” policies that require commercial buildings of a certain size to report their energy use through a common tool like ENERGY STAR’s® Portfolio Manager. Energy benchmarking is an important strategy for city-wide energy reduction, as building owners can see how their individual performance stacks up and policy makers can track and motivate progress over time.

In Seattle, for example, the aggregated data is anonymized, publicly available, and reported biennially. Individual building data is not shared publicly, but prospective tenants or buyers can request an “energy disclosure report” from the building owner or manager. Over 99% of eligible buildings have reported their data.

In the future, individual building data may be publicly available like New York’s restaurant letter grades, but privacy concerns have stalled many of these initiatives.

Tracking energy data over time helps quantify progress. The City of San Francisco, for example, saw a nearly 8% decrease in energy use across the properties tracked under the city’s benchmarking ordinance since 2010. Seattle noted a slight overall decrease of less than 1%, but discovered opportunities to reduce total energy consumption by over $50 million if all low-performing buildings were to rise to the median.

The City of Portland recently released their draft administrative rules for energy benchmarking, which will begin in spring of 2016. California recently passed Assembly Bill 802, which replaces the state’s existing energy disclosure rules with a simpler, more effective program that will make all the whole building’s energy publicly available.

Pay-for-performance incentives

Utility incentives help pay down the first cost of an energy-saving capital upgrade by offering a rebate for savings that the owner will capture over the life of the equipment. However, they’re structured to encourage “equipment-based” thinking rather than holistic or “systems-based” thinking. In other words, you can get an incentive to change your lights, but not to turn them off.

That’s where pay-for-performance incentives come in. These offer a fixed incentive for every kilowatt hour saved over an agreed-upon baseline. The program pays for actual, realized savings rather than predicted savings.

Both Seattle and Portland are in the middle of a pilot pay-for-performance program where three buildings and their energy services partners have an agreement with their utilities to pay a negotiated price per kilowatt hour. Now, for every energy-saving tactic building owners save twice: once through reduced energy and again by a payment from the utility.

Seattle City Light is in the process of rolling out a second-generation tiered incentive structure, where greater savings offer higher rebates. This will be piloted at the Pacific Tower modernization project.

Conclusion

The right policy can spark creative problem-solving and unlock the potential of the market for significant behavior change. These three policy innovations help cities, states and other governments shrink their carbon footprint, speed up their economies and improve the standard of living – in other words, realizing the full return on investment on energy efficiency.

Ash Awad, P.E., is McKinstry’s Chief Market Officer.