Building Decarbonization in California: Market ...



Building Decarbonization in California: Market Transformation at Scale TOC \o "1-3" \h \z \u I. Executive Summary PAGEREF _Toc3541800 \h 1II. Introduction PAGEREF _Toc3541801 \h 3A Comprehensive Vision for Market Transformation at Scale PAGEREF _Toc3541802 \h 3Making the Vision a Reality PAGEREF _Toc3541803 \h 4III. Toolbox PAGEREF _Toc3541804 \h 4Market Levers PAGEREF _Toc3541805 \h 4Key Actors PAGEREF _Toc3541806 \h 5Existing Building Decarbonization Legislation PAGEREF _Toc3541807 \h 7IV. Phase One: Market Readiness 2020-2023 PAGEREF _Toc3541808 \h 9Mission PAGEREF _Toc3541809 \h 9Approaches and Recommendations PAGEREF _Toc3541810 \h 9V. Phase Two: Market Deployment 2022-2026 PAGEREF _Toc3541811 \h 18Mission PAGEREF _Toc3541812 \h 18Approaches and Recommendations PAGEREF _Toc3541813 \h 18VI. Phase Three: Scaling the Market 2025-2035 PAGEREF _Toc3541814 \h 24Mission PAGEREF _Toc3541815 \h 24Approaches and Recommendations PAGEREF _Toc3541816 \h 24VII. Conclusion PAGEREF _Toc3541817 \h 27I. Executive Summary California is committed to achieving economy-wide carbon neutrality by 2045. Since buildings are responsible for over a quarter of the state’s greenhouse gas (GHG) emissions, eliminating those emissions will be key to meeting the 2045 carbon goal. California will only meet its 2045 carbon neutrality goal if it transitions the vast majority of building energy use away from fossil fuels.Near-zero emissions technologies that are acceptable alternatives to many of California’s building end uses are already commercially available, but the market conditions need much more development. Decarbonization technologies currently have minimal market penetration in California and consequently can be more expensive and challenging to install; furthermore, policy solutions are needed to remove legacy barriers to early adoption and to proactively support more aggressive decarbonization. This paper lays out a comprehensive vision for the market transformation that is needed to meet California’s building decarbonization goals. This vision includes specific policy recommendations that should be implemented over three market transformation phases: Phase One – Market Readiness Develop market fundamentals through five critical activities:Accelerate high-volume manufacturing of decarbonization equipment by focusing on new construction and existing electric heating homes;Create a solid value proposition for early actors, including contractors; Activate early demand in publicly-owned buildings; Align policies to remove structural barriers to entry; andDevelop tools to limit further expansion of the gas delivery system that will not serve the state’s 2045 climate goals.Phase Two – Market DeploymentRamp up equipment adoption and target high-potential hard-to-reach market segments by:Reviewing and refocusing engagement with manufacturers as necessary;Providing technical assistance and other support to midstream actors;Engaging local governments to support outreach, education, and local market development;Targeting hard to reach market segments to ensure equitable deployment of decarbonization resources; andOffering financing options to end users.Phase Three – Scaling the Market Coordinate among complementary clean energy initiatives to:Continue to drive down equipment costs and engage market participation through performance-based compensation; Use codes and standards to drive late adopters; andImplement a transition plan for underutilized portions of the gas delivery system that guarantees equity and safety. Each of the three phases is dependent on successful implementation of the work that must come before it. For example, a steady supply of equipment and a nascent but strong demand for that equipment must be developed in phase one before a majority of the installation workforce is willing to invest in building decarbonization value propositions in phase two. Similarly, most customers will need convenient and economical access to retrofit-ready equipment before they are able to benefit from demand aggregation and performance-based compensation services. Figure 1 maps the overarching market transformation goals to key milestones that must be met at each phase before further work can successfully build on that phase’s achievements. [Figure 1] While some of the specific outcomes from each phase remain uncertain, especially as the market transformation work is projected farther into the future, progress towards the key goals should be tracked at each phase. Insight from these market tracking exercises should be used to improve ongoing interventions and refine future approaches as needed. Successfully decarbonizing California’s buildings to meet the 2045 goals will require leadership and cooperation from a variety of government agencies, industry, and community organizations. Accordingly, the paper’s recommendations apply to this wide set of key actors. The Conclusion section maps the paper’s key recommendations to the actors that will be critical to its success. As always, the BDC remains committed to supporting each of these stakeholders as the state embarks on the necessary transformation towards a cleaner future for all Californians.II. IntroductionBuildings are responsible for nearly one fourth of the greenhouse gas emissions in California. Nearly half of those building sector emissions (44%) come from burning fossil fuels directly in our homes and workplaces. California will only meet its 2045 carbon neutrality goal if it transitions the vast majority of building energy use away from fossil fuels. This transition is also known as building decarbonization. California recently adopted two laws to begin decarbonizing the state’s buildings. AB 3232 (Friedman) directs the California Energy Commission to assess the potential to reduce greenhouse gas emissions from the state’s buildings by 40 percent below 1990 levels by 2030. Additionally, SB 1477 (Stern) authorizes the investment of $200 million of existing cap-and-trade revenues on market development for near-zero emission building technologies. The bill requires the CPUC, in consultation with the CEC, to develop and oversee the Technology and Equipment for Clean Heating (TECH) market development initiative and the Building Initiative for Low-Emissions Development (BUILD) program for new buildings. In order to comprehensively address all the emissions from buildings, California must commit to a coordinated transformation of the building appliances markets across the state. AB 3232 and SB 1477 are excellent first steps; however, much more action is needed.A Comprehensive, Coordinated Vision for Market Transformation at ScaleIn order to meet its 2045 climate goals, California must commit to decarbonizing all of its building energy uses. Once that commitment has been made, the state must get to work transforming the building and appliances markets. Near-zero emissions technologies that are acceptable alternatives to many of California’s fossil fuel-burning end uses are already commercially available; however, these technologies currently have minimal market penetration in California and, consequently, can be more expensive and challenging to install. Decarbonizing California’s building stock at the scale needed to meet the state’s climate goals will require quickly scaling up availability of near-zero emissions appliances; training an expert workforce that can confidently represent the benefits of decarbonization equipment and deliver quality installation results; overcoming technical challenges to installation in the existing building stock; and motivating consumers across California to transition to new appliances they may not have used before. Further, new classes of products must evolve to make it easier and less expensive for all Californians—including families living in multi-family buildings and older homes—to decarbonize their homes. The market transformation needs—equipment, workforce, and customers—are interdependent. Neglecting one would hamper progress across the board and risk wasting resources already invested in the others. Efforts to inspire consumers to switch to clean heating will be moot if they cannot easily find affordable heat pump appliances at their local home improvement store or if they are not offered by a contractor doing an emergency heating replacement. Conversely, a newly trained workforce will falter if there is not sufficient demand for their services. Therefore, California must facilitate a comprehensive transformation of the building end use market, with each agency delivering its pertinent expertise, and local governments, non-profits, and private industry leveraging each other’s efforts. Making the Vision a Reality The Building Decarbonization Coalition’s (BDC) Roadmap to Decarbonize California Buildings identifies the key barriers to mass market adoption of building decarbonization in California: Low awareness and interest, low perceived customer value, low perceived contractor and builder value, low availability, and misaligned policy. This paper offers policy options for how to best address those barriers and meet California’s building decarbonization needs at the speed and scale that is demanded by our climate goals. These recommendations build upon best practices published by the BDC by tailoring them to fit California’s market realities. Given the higher barriers to adoption in some cases, it will be important to focus initial investments on low cost— “low hanging fruit”—opportunities and preemptively remove barriers to a future fuel transition in new buildings. This will reduce cost for future, more complex mid- and long-term interventions. Mid- and long-term recommendations are similarly sequenced to further reduce overall building decarbonization costs. The sequenced, strategic approach proposed here will help California meet its clean air and climate goals at the lowest cost possible. The paper organizes the sequenced recommendations into three discrete phases. However, in practice, there should be overlap between phased interventions as the success of one leads into another. The paper’s proposed sequencing should be taken as high-level guidance for the state’s comprehensive building decarbonization efforts, leaving room for flexibility to adapt to the evolving market. Most importantly, California needs to remain committed to this market transformation and support it with the necessary long-term investments. III. Toolbox To decarbonize the economy by 2045, all available market development levers must be pulled to influence every aspect of the building appliances market from supply to demand. This section discusses those market levers, the key actors that will carry out the recommended approaches, and the existing building decarbonization legislation that was designed to jump-start this work. Market Levers In market development, supply and demand interventions must work in concert with one another to support the suppliers and consumers in the market. The terms “push” and “pull” are often used to convey different forces market actors can exert on a market. “Push” initiatives actively seek to increase supply and capacity with channel partners for a product. The objective is often to provide certain inventory or supply to promote (or “push”) that product or service to consumers through its availability. Examples of this are showrooms at appliance retail stores and contractors’ recommended product lists.“Pull” initiatives actively seek to increase demand for a product. Their objective is to create demand such that a consumer asks for a specific product or service. One example of a successful pull intervention is an education campaign that influences the consumer to ask their contractor for a specific rebate-eligible model.This paper promotes a hybrid push-pull strategy. This approach is most appropriate where the interest or demand for the technology or product is low or uncertain, but that broad demand and economy of scale are necessary to bring the product cost down and increase accessibility for more consumers. While demand is still nascent, it must be built in tandem with supply so suppliers (manufacturers, distributors, and installers) can capture the value of any investments made to provide that new supply. Generally, upstream interventions (which support manufacturing and technology innovations) and midstream interventions (which support the distributors and contractors that sell and install the technology) in this paper are “push” approaches and downstream initiatives (which market directly to consumers, such as through non-instantaneous rebates and technical support) and more local initiatives are “pull” approaches. However, “push” and “pull” interventions are not exclusive to a particular approach, like upstream or downstream; it is more a matter of what the intervention seeks to impact: supply or demand. Both “pull” and “push” efforts are equally important and require thoughtful sequencing and coordination so that demand supports a growing supply and supply meets the growing demand.-2412990Targeting the Technology and its Ecosystem: One of the key costs of decarbonizing existing buildings is related not to the decarbonization technology itself, but to the infrastructure it will have to plug into: the non-existent ventilation and wiring in an electric closet, a home’s current electric panel, and so on. These ecosystem challenges can alter the customer economics of building decarbonization significantly. For that reason, policy and market interventions will need to consider how to address them just as much as the technology-specific barriers Targeting the Technology and its Ecosystem: One of the key costs of decarbonizing existing buildings is related not to the decarbonization technology itself, but to the infrastructure it will have to plug into: the non-existent ventilation and wiring in an electric closet, a home’s current electric panel, and so on. These ecosystem challenges can alter the customer economics of building decarbonization significantly. For that reason, policy and market interventions will need to consider how to address them just as much as the technology-specific barriers Key ActorsComprehensive market transformation for building decarbonization in California will depend on engagement from many actors, ranging from government agencies to community organizations and private industry. Each will bring different strengths to the building decarbonization effort. The following actors, listed in alphabetical order, will be key to implementing the recommendations in this paper:The California Air Resources Board (CARB) regulates refrigerants and criteria pollutants in California and is responsible for developing and updating the state’s scoping plan for meeting its legislative GHG reduction goals. CARB also develops programs to fight climate change across industries—such as housing and transportation—which will be increasingly important as the state transitions uses across fuels. For example, CARB has played a central role in the electrification of the state’s transportation. The California Energy Commission (CEC) develops the state’s building energy codes, appliance standards, and benchmarking for new and existing buildings. Building codes in particular are an essential tool for removing barriers to decarbonization and locking in emissions efficiency in the state’s new generations of buildings. In 2019 the CEC adopted California’s first decarbonization-minded energy code update. Under AB 3232, which is described further in the next section, the CEC is also charged with assessing the potential to reduce GHG emissions from buildings by 40 percent below 1990 levels by 2030.The California Public Utilities Commission (CPUC) regulates the state’s investor owned gas and electric utilities. The CPUC has oversight over utility- and some CCA-led clean energy programs, such as renewable power purchases, energy efficiency, electric vehicle infrastructure, distributed energy storage, and most recently the SB 1477 programs described in the next section. Building IndustryDevelopers purchase land and prepare it for construction. This often includes making decisions regarding the installation of utility infrastructure, including fossil fuel distribution pipelines. Builders construct the state’s homes and other buildings, most often on land that has already been developed. Builders install fuel and power infrastructure, such as electrical panels and wiring, inside the home. Construction decisions are heavily influenced by consumer demand—homes are designed to meet the needs and desires of the targeted demographics. Building and Property Managers run the day-to-day operations of large residential complexes and multifamily buildings. They can also act as “gatekeepers” for capital expenditures. This makes them very influential in the purchasing and operation of decarbonization equipment. Energy ProvidersElectricity Service Providers, including Community Choice Aggregators (CCAs) and Direct Access providers aggregate demand for electricity and purchase the power to satisfy that demand. They do not own their own distribution infrastructure. Investor-Owned Utilities (IOUs) are private corporations that own and operate distribution infrastructure for gas and electricity. They also purchase gas and electricity and deliver it to their customers in California. Publicly-Owned Utilities (POUs) are municipal utilities. They perform the same functions as an IOU but are owned by municipalities instead of private investors. Original Equipment Manufacturers (OEMs) are the companies that manufacture building appliances such as heat pump space and water heaters. OEMs determine what equipment is developed and manufactured, at what volumes, and in what markets that equipment is made available. As the market indicates new needs, OEMs may have the capability to develop new products that support decarbonization for all Californians, such as equipment that is more economical to install in existing buildings. OEMs are referred to as the “upstream” of the industry. Equipment Distributors and InstallersLarge home improvement stores sell about half of the residential space and water heating equipment in California. This means that 50 percent of residential building decarbonization decisions will be heavily influenced by what is stocked by those retailers. Other distributors work directly to supply equipment to building contractors and space and water heating professionals. These distributors are often described as the industry “midstream.” Professional contractors, plumbers, and electricians procure and install building decarbonization equipment on behalf of homeowners. They are also considered part of the industry’s midstream. These professionals are often represented by industry organizations such as the Air Conditioning Contractors of America (ACCA). Financial Service Entities Public financing can be provided, often at lower rates, by various government institutions, such as the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA). Private financing is also provided by traditional banking institutions. These institutions offer a variety of financing products that could be used for building decarbonization equipment. Some of these products are provided through utility bills (such as with on bill financing) and other innovative instruments (such as property-assessed clean energy financing). Local Governments often have more limited financial resources but are very familiar with the communities they serve. They are uniquely positioned to understand local challenges to adoption and leverage partnerships with trusted community organizations and locally-based private industry to overcome those challenges. They can adopt local climate action plans and other policies to reduce emissions within their jurisdictions.Energy Efficiency Professionals have decades of experience working with property owners, managers, and tenants to retrofit existing buildings to make them healthier and more efficient. They are well aware of how best to overcome most, if not all, of the economic, engineering, and human barriers to building decarbonization. Workforce Agencies and Partners The Contractors State License Board (CSLB) regulates the state’s construction industry. CSLB’s regulations could either promote or prevent zero-emissions construction practices. Joint Labor Management-Training Committees run building trades apprenticeship programs across the state. The Joint Apprenticeship and Training Committees (JATCs) have graduated more than 80 percent of the electrical, sheet metal/HVAC, and stationary engineer apprentices in California since 2000. The California Workforce Development Board (CalWDB) oversees the State of California’s numerous workforce development programs, which include partnerships with secondary education, community colleges, and job placement programs. This list of key players is not exhaustive as it does not include every group that represents or is influenced by the various actors already on the list. For example, the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) and International Codes Council (ICC) are associations that both are influenced by and affect the building trades and local governments. The list will also likely evolve as the market develops and new industries grow along with it. Existing Building Decarbonization LegislationCalifornia has already taken several important first steps towards building decarbonization. In 2018, the state legislature enacted three laws aimed directly at reducing carbon emissions from buildings. The first law, AB 3232, directs the CEC to assess the potential to reduce GHG emissions from California’s commercial and residential buildings by 40 percent below 1990 levels by 2030. This sector-specific goal should align building sector policies and regulations, including building code metrics, with the state’s economy-wide emissions target for 2030. Further, as part of this work, the CEC and CPUC can work together to develop an equitable transition plan for underutilized portions of the gas delivery system. Devising a safe and equitable infrastructure transition strategy will be key to ensuring that all Californians can benefit from building decarbonization. Developing a plan for the equitable transition will require input from a variety of entities and action by several State actors. The second law, SB 1477, created two new programs to invest in cleaner buildings and building appliances through 2023. The programs, which will be implemented by the CPUC, are: BUILD (Building Initiative for Low-Emissions Development) will provide financial incentives for home builders that “build clean from the start.” Investing in new construction is important because the alternative, retrofitting buildings to reduce emissions once they are built, is much more expensive than decarbonizing during the design and construction process. In fact, just connecting a new home to fossil fuel infrastructure can cost between $6,000 and $8,000 or more. Building clean from the start avoids this type of investment that would be underused if the building is later decarbonized. The BUILD incentives will support single family and multifamily buildings that produce significantly fewer GHG emissions without increasing the associated utility bills. Builders can use a wide range of technologies and construction practices to achieve the emissions reductions, including heat pump appliances, solar thermal, energy efficiency, and combined solar and storage systems. BUILD projects will also help California’s construction industry develop expertise on how to make clean technologies a common and economic building practice. At least 30 percent of BUILD incentives are reserved for low income housing.TECH (Technology and Equipment for Clean Heating) will invest in market development for zero-emissions space and water heating appliances for new and existing residential buildings. Market development activities can include engagement with equipment manufacturers, contractor and distributor training, and customer education. TECH will also make available economic incentives to reduce the costs of installing zero-emissions appliances in California’s homes. TECH will make it easier for early adopters to learn about, purchase, and install the building decarbonization appliances that are central to meeting California’s climate goals. These early investments will also lead to economies of scale in manufacturing and process efficiencies in installation that will in turn make the appliances more affordable to more and more Californians. AB 3232 is an excellent first step towards aligning California’s policies with its building decarbonization needs; likewise, the SB 1477 programs will provide the necessary funding to kick start the market transformation efforts. The third bill, SB 1013, authorizes cap and trade funds to address global warming potential (GWP) in refrigerants starting in 2022. The CPUC, CEC, and Department of Community Services and Development are responsible for incorporating low GWP refrigerants into the energy efficiency programs they oversee or administer. Additionally, CARB is responsible for overseeing the Fluorinated Gases Emission Reduction Incentive Program to promote adoption of low GWP technologies.Much work remains to be done on both the policy and investment front. The rest of this paper outlines specific policy and market interventions that are needed to continue this work. Whenever possible the paper identifies available funding sources for the market interventions. For those interventions where the paper cannot identify current funding sources, California will have to consider new funding sources or re-prioritization of existing revenue streams. IV. Phase One: Market Readiness 2020-2023 Mission Develop market fundamentals through five critical activities:Accelerate high-volume manufacturing of decarbonization equipment by focusing on new construction and existing electric heating homes;Create a solid value proposition for early actors, including contractors; Activate early demand in publicly-owned buildings; Align policies to remove structural barriers to entry; andDevelop tools to limit further expansion of the gas delivery system that will not serve the state’s 2045 climate goals.Approaches and RecommendationsManufacturer Engagement and Incentives to Match Demand-Building Efforts The primary goals of manufacturer (upstream) engagement in phase one are to reduce equipment purchase costs and leverage consumer education campaigns to drive early sales. The market needs to see a long-term commitment to decarbonization technologies. A noticeable jump in early sales is equally important to kick-start manufacturing economies of scale that can lead to sustained equipment cost reductions. In other words, the market needs early and sustained investment. This can be achieved initially by focusing on driving sales for the lowest costs applications, including new construction—where cost savings from not installing fossil fuel infrastructure are immediate—and retrofits of existing homes that already use electricity—and therefore do not need electrical upgrades to accommodate new equipment—or more expensive non-regulated fuels for heating. The energy efficiency industry has been leveraging manufacturer engagement to streamline incentive delivery, capitalize on demand pulling approaches, and improve market impact for many years.A secondary goal of early upstream engagement should be to work with manufacturers to spur development of equipment for retrofit applications that are currently costlier. The Northwest Energy Efficiency Alliance’s (NEEA) Water Heating Initiative has engaged manufacturers, and installers through their Heat Pump Water Heating Specification process, whereby they have developed standards for HPWH for northern climate applications, and pair these efforts with installer support and encouraging downstream incentives from the various utilities in the region. California can use similar upstream strategies to support the development of high-efficiency low-carbon equipment that is better suited for the state’s specific needs. For example, a “retrofit-ready heat pump water heater” could reduce the need for electric panel upgrades in existing buildings or additional space requirements in current appliance closets.Upstream engagement can be supported by the SB 1477 TECH program; equipment costs can be reduced with BUILD program incentives. Both programs can help create early demand -- TECH by funding customer education campaigns and BUILD by facilitating equipment purchases for new construction applications. However, given the limited funds available through SB 1477, it will be important to also leverage other sources of funding to ensure demand grows rapidly enough to support manufacturers as they build equipment supplies. Recommendations and Next StepsPartner with OEMs to reduce purchase costs of high efficiency equipment for “low-hanging fruit” installations and spur development of equipment that addresses other adoption barriers: SB 1477 and successor programs should use monetary incentives to drive sales volume of highest efficiency equipment—initially these will primarily influence purchases for new construction, replacements of electric resistance equipment, and other low-cost opportunities. Publicly-funded programs should also leverage TECH consumer education and other demand-creation campaigns (such as partnerships between industry and non-profit groups) to increase demand for the incentivized equipment. Finally, engagement with OEMs should also work towards development of retrofit-ready equipment and other innovations in preparation for existing building retrofits in later phases.Leverage Existing Incentives and Engage Early in Affordable Housing Financing Process: Decarbonization programs targeting low-income new construction should engage early in the financing process for affordable housing. Further, following the recommendations in the CEC’s 2018 Clean Energy in Low-Income Multifamily Buildings Action Plan (CLIMB) report, the CPUC, CEC, CARB, and California Department of Community Services & Development (CSD) should “align efforts across existing programs to maximize benefits.” Early engagement will help ensure sufficient available capital and pooling available incentives will help low-income housing developers build the cleanest housing possible for California’s underserved populations in the most cost-effective way possible. Address regulatory barriers so that other funds, including energy efficiency budgets, can be leveraged for building decarbonization: Each year, California invests nearly one billion dollars on energy efficiency that reduces costs for all utility customers. Some of those funds could complement building decarbonization needs. For example, by layering additional incentives for efficient heat pump water heaters or by supporting market development for efficient induction cookstoves and food service equipment. However, various CPUC policies make it difficult to realize these synergies. The following changes would make it possible to align California’s energy efficiency portfolios with the state’s building decarbonization needs and long-term GHG goals: Update the three-prong test to allow for fuel substitution that reduces source energy use and GHG emissions. Adopt a new energy efficiency market transformation policy that supports long-term investments via a non-resource savings framework. Re-align CPUC cost-effectiveness tools to better recognize the value of GHG reductions and trade-offs across regulated fuels, relative to other factors, discounts, and costs. Driving factors in cost-effectiveness tests should reflect policy priorities. Early Midstream Engagement and Market Awareness As California’s market transformation efforts progress and more customers can economically purchase decarbonization equipment, it will be necessary to start tackling the installation barriers in retrofit scenarios. Accordingly, early engagement with the midstream industry (i.e., the distributors, contractors, and installers) will be important preparation for the retrofit work central to phases two and three. This early engagement should be about helping midstream actors familiarize themselves with new equipment, in particular with the installation and maintenance of that equipment. The BDC’s forthcoming midstream market assessments will shed further light on the sector’s needs. OEMs will also be key allies in this engagement since they understand their own distribution channels and how to influence them. A recent pilot program that offered sales leads to heat pump water heater replacements to contractors in the San Francisco Bay Area found that “contractors were not interested in installing [the] technology unless they were already familiar with it.” Even after meeting with contractors to explain the technology and installation process, the pilot found that contractors priced their project bids 25 to 50 percent higher than industry average to “allow for extra hours in case installation took longer than expected.” As contractors and installers become more familiar with the new equipment, they will be less likely to price these “risk premiums” into job bids, making decarbonization retrofits increasingly more competitive. Finally, as decarbonization jobs become more competitive, contractors and installers will have greater incentives for proactively selling the equipment to their customers, which would be very powerful in a market that is largely driven by emergency replacements and in which contractors and installers are trusted sources of information. Midstream engagement (along with the workforce education and training approaches discussed in the next section) also qualifies for TECH funds but would need increased funding to reach the scale necessary in the later phases of market transformation. Recommendations and Next StepsAddress perceived risk related to installing new technologies by facilitating hands-on installation: Programs that allow for hands-on experience installing new technology will help installers overcome the initial barriers to entering the decarbonization market. These programs could provide supervised technical assistance during “first jobs” and/or compensate contractors for the time premium they require during those first jobs. Leverage OEM sales trainings to help distributors and contractors realize and sell the value of zero-emissions technologies: OEMs know their own products best and depend on their distribution channels to drive sales for those products, which is why they develop and run sales trainings for their distribution networks. OEMs should be a trusted partner in helping distributors, contractors, and installers realize the value proposition of decarbonization technologies and training them on how best to proactively drive those sales. Workforce Training and Development A well-trained installation workforce will be crucial to the success of building decarbonization. Confident, experienced installers will deliver faster, more convenient and affordable installation experiences to customers and will ensure that equipment performs optimally. Without dependable performance, customers may not realize the economic value of the new equipment and building decarbonization could become more of a strain than an asset to the state’s power delivery infrastructure. Because the majority of building decarbonization installation work will be done by existing trades, the workforce training and development efforts should be designed to leverage the networks already in place, rather than attempting to reinvent the wheel. California should focus on leveraging existing partnerships with labor—since the trades that will be involved already take responsibility for the bulk of their workforce training and development—and on adding opportunities for hands-on experiential learning to the state’s other existing resources. Finally, if the need arises to adjust administrative requirements to reduce installation costs, the state can explore streamlining licensing requirements for limited, safe applications. Recommendations and Next StepsClarify current licensing requirements and explore the need for dual licensing for simple water heater replacements: In many retrofit scenarios, replacing a gas water heater with an electric heat pump heater will involve plumbing and electrical work. Some CSLB licensing classifications (such as C-10 Electrical) could be interpreted as allowing the necessary plumbing as “incidental” to the electrical work for the water heater replacement. However, the work covered by each classification is subject to interpretation by local building departments and installers. The CSLB should issue a letter to building departments and license holders clarifying the scope of incidental work allowed under licensing classifications. Further, as demand for heat pump water heaters in existing buildings grows, general contractors subcontracting with a variety of trades could drive up water heating retrofit costs. In that case, the CSLB may need to explore a new licensing classification that would safely streamline the requirement for gas to electric water heater replacement work. Work with JATCs to ensure apprentices are familiar with installation and maintenance of decarbonization technologies: The majority of new electricians and HVAC apprentices in California are trained through joint labor-management apprenticeship and training programs. By incorporating decarbonization-specific information into these programs, California can ensure that virtually every tradesperson in the state is qualified to do their part to install decarbonization equipment. Then, as equipment prices drop and the midstream channels see increasingly more value in selling decarbonization equipment, installers will be able to offer competitive proposals for decarbonization installations even when a consumer initially requests conventional equipment. This will be key to reaching consumers in the brief periods of time they are in the market for replacing building equipment. Provide technical assistance to existing downstream direct installation programs to build installation capacity: Existing programs, such as the cap and trade-funded Low-Income Weatherization Program (LIWP), provide direct technical assistance to contractors improving low-income buildings in California. Many of the LIWP projects already involve decarbonization work. The BUILD program will also include technical assistance for low-income developers and builders. The provision of expert technical assistance is a valuable opportunity to support the existing workforce as they learn how to install decarbonization equipment in real world scenarios. Therefore, the technical assistance component of these programs should be leveraged as a workforce development tool. Government-Owned Buildings and Procurement Local governments can also play a role early on with two market “pulling” approaches by decarbonizing their own buildings and leveraging their procurement process to support market development.Public buildings can often access capital at a lower cost than the private market, so they are better suited to absorb the potentially higher costs of equipment and installation as an early adopter. The size of public entities and scale of investment can help drive product and installation costs down by providing jobs and installation experience across multiple building types. Large scale procurement can also influence equipment costs, benefiting the public entity and the taxpayers that ultimately support public upgrades. Several public entities are leading in this area in California: State buildings in California, under CA Executive Order B-18-12, signed in April of 2012, established aggressive zero net energy requirements for new public buildings and renovations, required piloting zero net energy for three buildings, and created entity-wide emission reduction targets. All state buildings must also exceed the current California Building Code by 15%.In 2013, the University of California (UC) announced its Carbon Neutrality Initiative, committing to emitting net zero greenhouse gases from its buildings and vehicle fleet by 2025, something no other major university system has done. As part of this Initiative, UC has committed to 100% clean electricity by 2025 and eliminating the use of fossil fuels for on-site space and water heating in new or renovated buildings starting in June 2019.Cities of Los Angeles and Sacramento are showing leadership in decarbonization: Los Angeles authorized and funded research and assessment of building decarbonization strategies and aggressive efforts to electrify transportation. Sacramento Municipal Utility District launched an aggressive electrification incentive program. Other public entities such as the City of Palo Alto and Marin County are also supporting electrification efforts.Ideally, building decarbonization by a public entity is echoed by a forthcoming set of actions to be taken up by the private sector. For example, the City of Palo Alto has been pursuing a clean grid and electrification-related efforts for several years, from requiring electric vehicle infrastructure, to announcing carbon neutrality for electricity and natural gas, and adopting reach codes for all-electric homes. Stanford University, a prominent private university in Palo Alto, has also taken up the banner of beneficial electrification by decommissioning their cogeneration plant in 2015 and replacing it with industrial scale heat pumps and storage units. The actions of the City and University reinforce a local pursuit of building decarbonization.Statewide requirements can also be coupled with private sector targets or future requirements. Many commercial energy benchmarking laws have used this strategy. Establishing requirements that the public sector must meet first, but shortly after requiring the private sector to follow. An early adoption initiative for the private sector can create a competitive environment, inviting them to also show leadership alongside or even ahead of the public sector. Setting the expectation that the private sector will follow also provides certainty to the industry and can support more consistent investment in supply chains, labor and workforce, and implementation.Recommendations and Next StepsEstablish a public buildings decarbonization target: The CEC should establish aggressive targets for publicly-owned building decarbonization that address equity concerns, exceed state requirements, and align with private sector implementation. Targets should be time-bound with specific deployment metrics. Amend or replace CA Executive Order B-18-12 with a public buildings decarbonization goal. The Executive Order or other effective policy should provide an explicit decarbonization mandate, not just zero net energy. Provide timelines for adoption for state buildings and suggest future dates for adoption by local government buildings.The CEC in collaboration with local government associations should recommend model local government policies and/or programs encouraging local public buildings to adopt similar or the same public building decarbonization targets. While certain localities may take up their own decarbonization efforts, providing local governments a target that directly supports the state-level public buildings decarbonization target will help align activities and more effectively develop necessary markets.Leverage bulk procurement to continue driving down manufacturing and installation costs. Publicly recognize early private sector partners that support achievement of public sector targets: Pair the establishment of aggressive public building targets with an initiative inviting the private sector to also lead by example (e.g., launch an early bird decarbonization recognition program, celebrate a groundbreaking of an all-electric low-income new construction project). Some companies may value the publicity of meeting targets early alongside the public sector. Case studies, press releases, and all-electric building events will provide opportunities for entities to demonstrate their leadership. Provide local support for research and demonstration projects. Supporting the earliest actors can compel a larger campus or flagship business in the community to adopt decarbonization technologies, demonstrate results, gain recognition, and show partnership with the public sector. The State Allocation Board should develop targeted building decarbonization incentives for allocation of new school construction bond funds. In addition, the Governor and Legislature should consider allocating Proposition 39 and similar funding to incentivize local government and school building decarbonization.Aligning State Policies to Support Early Adoption and Remove Barriers to Entry There are a handful of other policy actions that are needed to remove barriers to decarbonization. Some have to do with establishing minimum GHG performance requirements for buildings, others are about easing implementation of existing policies and supporting actors that want to decarbonize further and faster. For example, decarbonization reach codes will enable motivated local governments to take even more leadership in the transition to cleaner buildings. Reach codes are local amendments to the state-adopted building code that outline a more stringent set of requirements or compliance pathway. These local amendments are an effective early market development approach since they can push the local market to go beyond state requirements. Another benefit of a reach code is that it can also provide insight to the market as to where regulation is headed, allowing developers to guide their investments to meet those expected codes. Reach codes provide some certainty to the market, insofar as they are developed with the intention of being adopted in the future. In some cases, these codes are voluntary (often then called “stretch codes”) with incentives such as a tax credit or additional allowable density. In other cases, the amended codes are locally required. The California Energy Commission allows reach codes by local jurisdictions, subject to cost-effectiveness requirements.The state will also need to develop a new approach to evaluating future incremental investments in the gas delivery system to reduce the risk of underutilized assets as California relies upon higher levels of electrification to power buildings. The new approach should balance the need to ensure the safety and reliability of the system with the imperative to reduce the risk of sunk costs and stranded assets in the near future. Recommendations and Next Steps328739596912Rate Design: Advanced rate design for zero carbon electricity is key to enabling positive customer economics for mass building decarbonization. The BDC white paper Rate Design for Beneficial Electrification explains rate design priorities and solutions. This work needs to begin during phase one so that the necessary rate designs are available for early adopters in phase two and the mass market in phase three. 0Rate Design: Advanced rate design for zero carbon electricity is key to enabling positive customer economics for mass building decarbonization. The BDC white paper Rate Design for Beneficial Electrification explains rate design priorities and solutions. This work needs to begin during phase one so that the necessary rate designs are available for early adopters in phase two and the mass market in phase three. Adopt rate designs that better reflect California’s energy costs and decarbonization priorities: In the near term the CPUC should adjust baseline allowances to avoid penalizing new beneficial electrification loads, offer cost-based time-differentiated rates that accurately reflect grid costs and GHG emissions, and revisit time-independent high usage and demand charges. In the long term, the CPUC will need to explore more innovative grid harmonization rates.Include decarbonization equipment in ongoing normalized energy metering and integrated resource valuation work. The CEC should disseminate clear information to local building departments so no decarbonization projects are delayed or wrongly denied permits: Because of the complexity and frequency of updates to the energy code, the local building departments that enforce that code can be left with uncertainties about what equipment is and isn’t allowed under the latest code version. Those uncertainties can lead to homeowners being required to perform unnecessary compliance calculations and even getting permits wrongly denied. Align Title 24 cost-effectiveness to remove barriers to all-electric construction: The CEC, in collaboration with the Department of Housing & Community Development and the Building Standards Commission, should evaluate appropriate and policy-supported changes to the Time Dependent Valuation (TDV) used for Title 24 and Reach Code cost-effectiveness, to ensure different fuel uses are valued properly such that both energy efficiency and emission reductions can be achieved through all-electric construction. Use the Building Standards Commission’s CALGreen process to pre-authorize model reach codes that support aggressive decarbonization and are ready for incorporation into retrofit on resale and other improvement ordinances: Reach codes should be incremental and re-evaluated and amended with each new state building code; they could also be categorical (exemptions for all-electric buildings like the reach code exemption in Palo Alto) and be eligible for adoption over a set period of state building codes (e.g. applicable through 2020 California Building Code adoption). Further, more aggressive reach codes should be valid for adoption beyond current code cycles, so long as they require and result in greater emissions reductions.Use an open and transparent stakeholder process to design reach codes of interest to local jurisdictions. Such reach codes should be aggressive and visionary to maintain their leadership beyond the current code. -239395659765Time Dependent Valuation (TDV) is reflects the CEC’s responsibility to promote energy efficiency and conservation. As such, while GHG emissions are part of the calculations, they are not a driving priority in determining the cost-effectiveness of codes. A recent analysis conducted by E3 on behalf of the CEC found that while lifecycle emissions are consistently lower for all-electric homes, the TDVs for all electric are higher in all climate zones. The E3 analysis found that the TDV gap is largely driven by lower natural gas prices and the cost of carbon allowances, and so looked at the carbon pricing, rates, and construction costs necessary to close the gap. Other analyses have also found that TDV is not a sufficient metric for determining the emissions-optimal fuel for new construction and could be a barrier to decarbonization. Time Dependent Valuation (TDV) is reflects the CEC’s responsibility to promote energy efficiency and conservation. As such, while GHG emissions are part of the calculations, they are not a driving priority in determining the cost-effectiveness of codes. A recent analysis conducted by E3 on behalf of the CEC found that while lifecycle emissions are consistently lower for all-electric homes, the TDVs for all electric are higher in all climate zones. The E3 analysis found that the TDV gap is largely driven by lower natural gas prices and the cost of carbon allowances, and so looked at the carbon pricing, rates, and construction costs necessary to close the gap. Other analyses have also found that TDV is not a sufficient metric for determining the emissions-optimal fuel for new construction and could be a barrier to decarbonization. The CEC should partner with local government associations, elected officials, and local code and permitting officials to provide education around adoption and implementation of the pre-authorized reach codes. Include explanation of priorities and goals, such as decarbonization, to explain the changes to code and the expectation that the code supports those goals. Invite feedback through the enforcement process to ensure codes clearly reflect the intent to promote decarbonization and emission reductions.The model reach codes should be designed to provide a research opportunity for future building code development, allowing certain jurisdictions to adopt certain requirements early and provide data on adoption levels, compliance, and performance outcomes. Evaluation, both quantitative and qualitative, should be conducted to determine uptake and impact of reach codes or other voluntary stretch codes.Revise the inputs used to calculate gas line extension allowances per CPUC Gas Rule 15/21: The CPUC allows utilities to cover some (or all) of the cost of extending the gas system to provide service to new buildings. The cost of these service extension allowances—which is determined through a calculation laid out in CPUC Rule 15 (Rule 21 for SoCalGas)—is added to the utility’s rate base and the utility then recovers it through customer bills over time. Two key inputs in that calculation are the annual revenue expected from the new gas service customer and the expectation that gas system infrastructure will last for at least 60 years. These inputs should be adjusted to reflect the expectation of declining individual building gas use and declining throughput in the gas delivery system as the state works to meet its long-term building decarbonizations goals. In particular, reducing the 60 year asset life assumption within the cost of service factor will ensure that utility customers are not held responsible for the cost of gas system extensions that are likely to be underutilized by 2045. Limit further uneconomic expansion of the gas delivery system to serve new buildings: Current law requires gas utilities to serve all gas retail customers within their service territory on a non-discriminatory basis. No tools currently exist to limit expansion of the gas system to new buildings, even when those expansions may be uneconomic or counter to the state’s climate policies. Current policy requires that most of the costs associated with expanding the gas distribution system be included in a utility’s rate base and slowly recovered from all of that utility’s customers over time. As throughput on the gas delivery system declines as a result of building electrification, all gas utility customers, not just those responsible for the expansion in service, may take on the cost of assets that will need to be retired earlier than expected. Utilities, state regulatory bodies, and infrastructure planners across the state may need additional tools to exercise greater discretion as to the reasonableness of some extension investments in light of the potential for declining throughput from electrification. V. Phase Two: Market Deployment 2022-2026MissionRamp up equipment adoption and target high-potential hard-to-reach market segments by:Reviewing and refocusing engagement with manufacturers as necessary;Providing technical assistance and other support to midstream actors;Engaging local governments to support outreach, education, and local market development;Targeting hard to reach market segments to ensure equitable deployment of decarbonization resources; andOffering financing options to end users.Approaches and Recommendations Upstream Meets MidstreamEarly and sustained efforts to reduce equipment purchase prices and grow demand for low-cost decarbonization opportunities should set off a virtuous cycle of growing sales and falling equipment costs. By 2022, market readiness dynamics will have led to a wider availability of more cost-competitive off-the-shelf technologies as well as retrofit-ready equipment, growing installations in new construction and other low-cost applications, increasing contractor interest, and available apprenticeship programs. California will need to periodically assess progress, re-calibrate the focus on upstream interventions, and invest in other interventions to unlock further decarbonization opportunities as those too become cost effective. Focusing additional resources on midstream support will help California reach deeper into the bulk of the building sector. Conversions of existing all-electric homes and propane customers are not likely to be exhausted entirely within phase one efforts, and new construction will remain an important market segment for the foreseeable future. However, to be prepared to tackle the challenges of the larger existing buildings segment, California will need to provide more concentrated support for midstream actors by 2022. Midstream interventions have already led to some great successes in building decarbonization in the United States. For example, Vermont Energy Investment Corporation’s (VEIC) midstream heat pump program partners with distributors and contractors to improve their willingness and ability to sell high efficiency decarbonization equipment. Program incentives are designed to reduce customer costs and yield a financial return to midstream actors for increasing sales. Since launching in 2014, participating distributors have seen a 750 percent increase in heat pump water heaters sold and a 90 percent increase in cold climate air source heat pumps sold. Recommendations and Next StepsAssess the impact of upstream engagement and the status of midstream needs: California needs to track the impact of initial investments in order to properly calibrate where decarbonization investment is most needed in later phases. For example, technological advancements made through upstream investments will determine the highest potential market segments ready for broader equipment deployment, such as HPWH systems designed for more complex buildings. It will be equally important to understand how installation barriers—such as the need to upgrade electrical panels for some building retrofits—will impact the feasibility and cost of new projects. By understanding how the market is evolving, California will be ready to go after new opportunities as they become cost-effective, and address new barriers (such as allowing panel upgrades to be included in certain installation incentive programs) in conjunction with market deployment efforts. Focus new decarbonization funds on the barriers facing the next “tranche” of cost effective opportunities: Informed by ongoing market analysis, California regulators and program administrators should begin preparing the market to deliver cost-effective existing building decarbonization projects even when those retrofits may require more ancillary work (e.g. ventilation solutions for water heater closets). A “test and learn” approach to midstream interventions early in the market transformation effort may help improve the efficacy of scaled-up midstream support that will be necessary in the later phases. Midstream Support from State-Level Programs To support broader market deployment, California will need to address structural retrofit challenges in existing buildings. Supporting the midstream distribution and installation channels will involve a variety of interventions designed to tackle key barriers to adoption in existing buildings: Low perceived customer value, low perceived contractor value, and low awareness and interest. The following recommendations will address these barriers by reducing the cost of retrofit installations and building a value proposition for contractors and the workforce. Recommendations and Next StepsDevelop midstream interventions that target installation challenges: Some of the biggest challenges to retrofitting existing buildings are not directly related to the decarbonization technology itself, but instead have to do with the building infrastructure the technology connects with. One key example is electrical panels that do not have enough capacity to serve added space and water heating load. Midstream interventions provide ample opportunities to address this. For example, building decarbonization efforts could coordinate with ongoing electric transportation infrastructure upgrade efforts to ensure adequate electrical capacity for heat pump technologies. Other smaller, but possibly more prevalent, examples include designing and marketing expanded water heater and mechanical closets to allow for certain larger heat pump technologies, increased ventilation, and running new electrical circuits to those closets. Interventions that target these ecosystem challenges could range from simple midstream rebates for comprehensive installation services to business innovation grants that reward technological solutions to installation challenges. Cover “first job” risks via midstream rebates and other similar incentives: The risk premiums observed in early pilots will continue to be priced into installation bids until the market is truly comfortable with installing and maintaining new decarbonization technology. Therefore, in addition to making available hands-on training opportunities, California will also have to offer financial support (such as installer rebates) to motivate contractors to take on decarbonization jobs at profitable and reasonable costs. Leverage co-marketing efforts: Customer decarbonization education efforts should leverage existing clean energy awareness campaigns, such as California’s Energy Upgrade California initiative and other mass media campaigns designed to inspire Californians to switch to zero-carbon building appliances. As equipment costs continue to drop and utility rates are updated to strengthen the economic value proposition for customers, marketing interventions should build upon those demand-building efforts. Echoing successful messaging, emphasizing the established value propositions, and otherwise co-branding across the push and pull approaches will ensure that supply and demand forces are activated in tandem for sustainable market transformation. Target Existing Multifamily, Low-Income, Disadvantaged Communities, and Other Hard to Reach Sectors California should not only target hard to reach, disadvantaged residents and businesses, but use these efforts to support the broader market transformation effort. Multifamily, low-income, disadvantaged communities, and other hard to reach sectors offer a valuable opportunity to leverage co-funding, develop new products, and fine-tune installation practices. Complex installations can serve as the testing ground for advanced equipment and practices that will then help bring building decarbonization to full scale across California. For example, decarbonizing multifamily buildings will involve working with the building residents as well as the property owners and managers. Larger buildings will often require direct technical assistance to ensure that complex equipment is properly engineered, installed, and operated. Both of these are opportunities: first to better understand the real needs of potential decarbonization customers and then to train installers on more complex decarbonization deployments. These assisted, hands on training experiences can help create a workforce that is more confident and therefore less likely to price risk premiums into retrofit installations. Recommendations and Next StepsProvide technical assistance for hard to reach populations: Some customers will need more technical assistance than others. For example, installing new central heating equipment in multifamily buildings will be more complex than replacing a single-family home’s HVAC system. By focusing downstream efforts with technical assistance on the more complex opportunities, California can help all residents receive the support they need to participate in building decarbonization. Leverage bulk procurement for large-scale installations in affordable housing projects: As upstream incentives bring manufacturing and second-generation products to scale, it will be feasible to purchase equipment in bulk for simpler low-income applications—for example, the same model of a retrofit-ready heat pump water heater could be installed in a large number of existing affordable housing units. An early test case for this strategy could be the procurement of equipment for electrification pilots in the San Joaquin Valley. The San Joaquin Valley pilots could examine the effects of bulk procurement on participants’ equipment costs and OEMs’ production and distribution practices. Direct decarbonization funding to customers who use propane and other non-regulated fuels: Two large sources of potential funding for building decarbonization are tied to utility customers: revenue from cap and trade allowances awarded to gas and electric utilities and public purpose program funds collected through utility bills. However, about ten percent of California’s homes depend on other fuels (including propane and wood) for space and water heating. The climate benefits of transitioning those homes to cleaner fuels will be enjoyed by all Californians; therefore, decarbonizing those homes should not be delayed simply because key funding sources are related to regulated utility billing. Local Government Engagement Local governments know how to connect with their communities, whether through messaging on local issues that matter most, or through businesses associations and chambers of commerce that connect local contractors with new opportunities. Permitting offices within local governments are also a trusted resource for clarifying and socializing new or modified energy codes. Given these strengths, local governments and other geographic-specific entities can be most effective in tailored public outreach, permitting education, supplementing state incentives, and securing financing for customers.Recommendations and Next StepsDevelop decarbonization messaging templates to support local government outreach and education: Decarbonization advocates and local government associations should develop clear messaging for local governments to incorporate in their materials, on their websites, and in briefings to elected officials to expand understanding of the role of decarbonization in achieving local climate goals. Materials should include: Decarbonization basics: the temporal aspects of energy savings, time of use rates, the importance of efficiency and conservation, and raise awareness about emission factors for different energy fuels. Information should shift away from a sole focus on energy efficiency and conservation to emission reduction strategies.Case studies of relevant demonstration projects or pilot programs that showcase positive results of using decarbonization technologies. Case studies can provide public recognition to local early adopters, raising the social norm and perception of rmation on how to purchase and install near zero-emissions heating appliances, including induction cooktops. A key message should include planning ahead for the eventual failure of their current HVAC or water heating system, identifying a reliable contractor in advance that supports that technology, and learning about available incentives to offset the incremental cost difference.Installation cost consideration such as additional electric wiring or paneling, providing additional space for side piping (heat pump water heaters), and the potential for demand response with an electric water heater tank. Cost considerations can be accompanied by financing options available through local banks, PACE financing providers, utility programs, or a statewide program.Enhance permitting and code enforcement resources: As Title 24 adopts changes, revisions, or reforms, it will be critical to provide dedicated training, education, and support to local government permitting offices. Particularly, if foundational aspects of the energy code change, such as how energy sources are valued and calculated, inputs to the time dependent valuation calculation, or other technological or physical requirements that have been unchanged for many years, conveying these important changes and how they support decarbonization will be important.Provide regular permitting and code enforcement information to mitigate confusion and additional costs in the permitting process. Education and training should include general information about permitting costs and process for both contractors and customers, as well as workshops with installers to familiarize them with any code requirements and application to the installation process. Familiarization and experience permitting heat pumps will support increasingly streamlined permitting processes. Recent CEC “quick guides” and private resources such as Energy Code Ace have proven valuable to permitting staff of local jurisdictions.Permitting offices can also provide a streamlined process or “basic approval path,” for certain types of installations that meet common parameters, and reserve more detailed review for projects with unique specifications that need to be reviewed beyond a “basic approval path.”FinancingInvestments in decarbonization, whether accelerated or emergency replacement, will often be outside of the scope of a business’s investment plans, or beyond a homeowner’s planned home repair budget. An outside and additional capital source, especially one structured specifically for a decarbonization investment, could be the key to that customer moving forward with such upgrades. Ideally, this capital solution would be low cost (low/competitive interest rate), eliminates upfront cost by covering the full cost of the equipment and installation, and has loan terms (e.g. payback duration) to even out cash flow impacts, or even produce a cash flow positive investment. While decarbonization may be a public sector effort, public funding alone will be insufficient to meet decarbonization goals and timelines. Instead, energy financing programs can partner with and encourage private sector lenders (e.g. community banks, credit unions, corporate banks) to expand investing for these new technologies and even provide loan terms that match the timelines and value of decarbonization technology.The most successful energy financing programs have been able to accomplish some key market development objectives. For example, TVA’s program for heat pump water heaters has removed the barrier of upfront cost through an easy on-bill financing program. Customers can apply and get loan approval quickly (sometimes under 30 minutes, and at least within the day for standard applications), have the work completed upon program and financing approval, and repayment happens through their electric bill as a separate line item. California is already establishing energy financing programs based on the successes around the country:The California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) out of the State Treasurer’s Office is administering the California Hub for Energy Efficiency Financing (CHEEF) Pilot Programs, partnering with the CPUC, IOUs, lenders, and contractors to provide lower-cost financing for energy efficiency investments. These financing programs, at least in part, are already capable of supporting decarbonization, though the primary goal is energy efficiency. During the pilot period ending in July 2018, the residential program supported $6.5 million in loans (with a $900 thousand loan loss reserve) and supported 340 projects, 24 of which included heat pump technology. Of those 24 projects, over half were completed without an additional rebate incentive. The commercial program pilot regulations were adopted December 2018 and the program will be launching in mid-2019. Investor Owned Utility on-bill financing (OBF) programs offer 0% loans to non-residential customers. These programs have a minimum loan amount of $5,000 and maximums of $100,000 for non-residential and up to $250,000 for governmental customers (up to certain limits per customer). The financing terms are limited by a bill neutrality requirement and a term limit of no more than 10 years, but they provide a convenient way for customers to access no-cost capital for efficiency upgrades.PACE Financing (residential and commercial) offers 100% financing at market-competitive rates with security through placement on the property’s tax bill. PACE financing must be locally authorized since they require placement on the local property tax bill, and not all local governments have opted to participate. Recommendations and Next StepsCAEATFA Enhance CAEATFA funding with incentives (credit enhancements) that target decarbonization technology deployment: The CPUC should consider the use of decarbonization funding to provide interest-rate buy-downs for CAEATFA financing when it supports decarbonization. This would provide additional motivation for partnering lenders and their contractor networks to explore decarbonization opportunities with customers, and make the financing for decarbonization preferential to other types of upgrades.Streamline CAEATFA financing program participation with on-bill repayment: The CPUC should work closely with CAEATFA to support on-bill repayment of pilot programs as they move into full implementation, allowing the Residential Energy Efficiency Loan (REEL) and Commercial Small Business Program to be serviced through the utility bill. This further simplifies the financing products and supports customer investment in energy efficiency and decarbonization. Expand state-supported financing programs to customers outside of IOU territory: Municipal utilities should work with CAEATFA or a similarly qualified entity (public or private) to develop similar financing programs for customers outside of IOU territory. Such financing programs could be built in conjunction with the different incentive programs being provided by municipal utilities.IOU OBF ProgramsAllow financing for fuel-switching measures that reduce emissions and are bill-neutral or -positive across all fuels: The CPUC should expand the definition of bill neutrality beyond the bill from the OBF-providing IOU and allow emission-reducing fuel switching to occur. The whole customer’s set of energy bills should be considered to capture the customer’s total energy costs and emissions profile. This will allow customers who are choosing new efficient equipment, regardless of their current fuel, to receive financing for equipment that will be bill neutral across all of their energy costs as long the equipment also reduces emissions. Consider use of other sources of funding through the OBF mechanism: Explore other decarbonization funding sources that could support an on-bill financing program and integrate with the current energy efficiency on-bill programs. The customer should experience a single financial transaction and installation period, but the funding for certain measures may come from different sources. This could allow measures (or DERs) otherwise supported through other programs outside of energy efficiency to be included in a single customer experience. VI. Phase Three: Scaling the Market 2025-2035Mission Coordinate among complementary clean energy initiatives to:Continue to drive down equipment costs and engage market participation through performance-based compensation; Use codes and standards to drive late adopters; andImplement a transition plan for underutilized portions of the gas delivery system that guarantees equity and safety. Approaches and Recommendations Drive Downstream Demand through Performance-Based Compensation The state of the 2025-2035 electric grid is challenging to predict given the myriad clean energy goals in California. That said, we can predict that some level of integrated resources planning, distribution resources planning, and grid services compensation will be in place. With these tools, building decarbonization advocates can continue to drive down costs of decarbonization through consolidated program offerings and performance-based procurement and compensation. Integrating decarbonization technologies with controls, meter-based measurement tools, strong and accurate price signals, and a full valuation of emission reductions will ensure that the multiple value streams of building decarbonization can be appropriately compensated and incentivized. Accomplishing this will require efforts on key policy issues such as integrated resource planning, demand response, and meter-based incentives. California is already working on several of these fronts, which do not need to be independently addressed in decarbonization activities; however, coordination is critical to aligning policy advancements that lead to a decarbonized economy in 2045. Recommendations and Next StepsSupport market innovations in control, sensors, and energy management technologies: Building decarbonization equipment will need controls and sensors to be responsive to the price signals of an improved grid valuation framework. Hardware and software systems must be developed and refined to optimize these technologies for California grid system and customer users. The CEC, through the Electric Program Investment Charge (EPIC) Program, should research innovations in technologies, such as controls, sensors, and energy management systems. Formalize, test, refine, and further establish normalized metered energy consumption (NMEC) measurement methods: Transparent measurement and accounting of the services of decarbonization technology, energy efficiency, demand response, and DERs will depend on a reliable and accessible method to determine NMEC. The CPUC has established early guidelines on NMEC for energy efficiency projects, including different levels of review rigor for site-specific or population-based projects. The CPUC should continue to refine its NMEC guidelines based on learnings from its application within the energy efficiency portfolio, the Clean Energy Optimization Pilot, and other DER implementations. Refine and establish grid valuation frameworks: Customers and the DER service providers that can help aggregate and operate those assets need accurate and clearly communicated energy, grid services, and emission reduction values in order to make DER and decarbonization decisions that optimize service to customers and the grid. The CPUC in collaboration with CAISO should, with stakeholders, establish price signals that value the grid benefits of decarbonization technology and can be incorporated into the design of programs and tariff rates. Ensure that these price signals incentivize the deployment of DERs in areas where they can benefit the grid and, where feasible, minimize the cost of interconnection to customers.Improve valuation of building decarbonization assets for incorporation into integrated resource planning: The CPUC should incorporate the role of building decarbonization in integrated resource planning frameworks and valuation methodologies, considering control and management capability, storage and load shifting capacity, as well as energy efficiency/conservation and emission savings, and contributions to a broader energy portfolio.Use Codes and Standards to “Bring Up the Tail” on the Technology Adoption Curve Several jurisdictions across the nation are already using innovative policy tools to help existing buildings meet energy performance requirements: Berkeley, CA and Portland, OR require energy use disclosures when building ownership changes (i.e., at the point of sale). These information-only requirements are intended to educate prospective buyers on the cost of operating buildings they are considering purchasing. New York City Local Law 87 requires that existing building systems be retro-commissioned every ten years. The retro-commissioning requirement includes an ASHRAE Level 2 audit, which would uncover energy upgrade opportunities to reduce building operation costs. Boulder, CO’s SmartRegs policy required all multifamily rental buildings to adopt select energy efficiency upgrades by 2019 in order to maintain their rental licenses. SmartRegs was adopted in 2010. The Clean Energy DC Omnibus Act passed by the District of Columbia in December of 2018 requires that existing buildings of a certain size meet building performance standards starting in 2021. The performance standards will be equal to the median ENERGY STAR score for that type of building. Buildings that do not meet the performance standard will have five years to comply, either through a prescriptive compliance pathway of cost-effective measures or through a performance compliance pathway to achieve a 20% reduction in site energy intensity. The standard will apply first to private buildings of at least 50,000 square feet, with the size threshold decreasing steadily until buildings of 10,000 square feet must also meet requirements in 2026. While the above examples pertain to energy efficiency requirements, they offer best practices that can inform similar approaches to decarbonizing laggard buildings: using robust stakeholder engagement processes to build community support and develop successful policies; timelines for compliance that allow the market to adapt; and the availability of pre-existing and ongoing support (e.g., financial and technical assistance) throughout the compliance period. Next Steps and Recommendations Put in place performance standards with long enough lead times to allow existing buildings to gradually improve: Decarbonization requirements should strike the right balance between continuous improvements towards meeting California’s 2045 goals and acknowledging that building improvements take time to finance and implement. Reasonable compliance timelines will allow the market to adjust—for example, building owners will be able to incorporate upcoming requirements into their normal capital planning processes and minimize the operational impacts related to regulatory compliance. Continue the necessary economic support for retrofitting remaining affordable housing and other vulnerable buildings: While building codes may be considered the “law of the land,” the reality is that there are costs—both hard and soft, such as when building operations are interrupted—to comply with those mandates. The buildings that house California’s most vulnerable populations will need support to decarbonize without passing on those costs to their residents. For that reason, those buildings should continue to benefit from decarbonization programs even at the latter stages of market transformation. Implement a transition plan for underutilized portions of the gas delivery system that guarantees equity and safety. As building decarbonization efforts progress, customers will rely less and less on fossil fuels to power their building needs. This will eventually pose a challenge regarding California’s natural gas distribution system: how to maintain and operate the system safely as gas throughput declines without disproportionately affecting any one group of customers. California needs to plan for this challenge far in enough in advance so that solutions are ready for implementation when needed. Phase one identifies that the natural gas system must stop unnecessary expansions by 2020; by 2025, California must have a agreed-upon plan ready to implement to mitigate potential risks and additional costs. Next Steps and Recommendations Gather the data necessary to make informed decisions, including quantitative, real-life data on the following issues: The current un-recovered value of natural gas assets including additional investments in the gas system to maintain safety and reliability, projected cost recovery timeline under business-as-usual and aggressive decarbonization scenarios, and the geographic distribution of assets near their end of useful life. Cost of the median departing customer in near-, mid-, and long-term scenarios. Economic, environmental, and market feasibility analyses of alternative uses for segments of the remaining system (including hydrogen and biomethane). Pursue the necessary regulatory proceedings to evaluate, design, and implement a just and safe transition away from the natural gas system. Early options for discussions could include:Geographic coordination of advanced building decarbonization (i.e., strategic electrification) on segments of the gas system already nearing the end of their useful lives. Securitization, accelerated depreciation, and other financial/accounting tools. VII. Conclusion California must rapidly decarbonize its buildings in order to meet the 2045 carbon neutrality goal at the lowest cost possible. Most of the necessary technology for this decarbonization is already available—making sure that it is widely adopted is now a matter of leadership and political will. The Building Decarbonization Coalition recently provided the state with a path forward and a coalition of the willing to support the state’s building decarbonization transition. This paper lays out specific policy changes and market interventions to facilitate the comprehensive market transformation that is needed in the state. Figure 2 maps these necessary approaches to the key actors that will be critical to each recommendation’s success.[Figure 2]The tools are now at California’s disposal. As always, the BDC remains committed to supporting the state in this critical transformation towards a cleaner future for all Californians. ................
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