Creating a New Paradigm for Energy Utilities with MEETS Coalition’s Rob Harmon

July 17, 2015

 
John Shegerian: Welcome to another edition of Green Is Good. We are so honored to have with us Rob Harmon. He is the Director of the MEETS Coalition, among other things, which we are going to talk about today. Welcome to Green Is Good, Rob. Rob Harmon: Great to be here. Thank you. John Shegerian: You know, Rob, this is the GoGreen edition of Green Is Good. Tell me about why you are here today and why the GoGreen conference is so important to what you are doing and trying to accomplish at the MEETS Coalition. Rob Harmon: Well, there are a lot of people here who are really interested in solving big problems. John Shegerian: OK. Rob Harmon: And the MEETS Coalition was created and the MEETS transaction structure for energy was created to try and get around the things in the energy efficiency marketplace that are preventing us from doing energy efficiency at scale. So I like to go after problems where you’ve got a lot of people who want to do something and a lot of people who want to have it happen and something that is broken in the middle, and I like to try and figure out if I can fix that broken thing, and we did it with this so I am pretty excited. John Shegerian: And we are talking about today creating an energy utility that really works for the future. Rob Harmon: Yeah. We’re talking about how the utilities that already exist today can survive in a world where society is asking them to do much deeper energy efficiency. And in the existing transaction structure that they use, when they do energy efficiency, they sell less of their product. John Shegerian: Got you. Rob Harmon: And we don’t normally ask businesses to do that, right? And there are good reasons why we’d ask them to do that and there are good reasons for them to do it, but it is still a real challenge if you want to do it at scale. It’s one thing if you were to ask an apple farmer to sell one less apple, but if you ask him to stop selling half his apples…. John Shegerian: There’s a problem. Rob Harmon: It’s a bit of a problem. So we think we’ve got a solution that will really help utilities address that problem, which will also help building owners go deeper in their building and investors be able to invest for longer terms and a bunch of other things that are important. John Shegerian: Before we get talking about the MEETS Coalition and your being the Director there, plus also the other company, the EnergyRM, where you are the President and CEO, I want to talk a little bit about the Rob Harmon story. Talk a little bit about your journey in sustainability, where you got inspired, how you got fired up about it, which led to this great leadership role that you have today. Rob Harmon: Well, it’s a long story, and it started probably when I was 16 and my father put together an energy expo in Brooklyn, New York, where I lived. John Shegerian: Really. Rob Harmon: This was 1981. John Shegerian: Wow. Rob Harmon: And I saw my first electric car. And what I also saw there was a group of people – the vendors, the same kind of people you see here today – who were making a living doing things that helped other people and helped the planet they were living on. So they were helping the economy and helping all of us and helping the planet, and I went, “Well, what’s wrong with that?” And I kind of never looked back. Now when I went to college, I was a Financial Aid student in college, so I had to do a work study and I saw in the college, I guess it was the newspaper, there was this job for “energy assistant.” And so I read the description and I went to talk to the guy who was the energy manager on the campus and we hit it off, and so I was the guy on the campus that would go around and read the energy meters and put insulation up on the walls and weather stripped the doors. John Shegerian: That’s great. Rob Harmon: This was in 1982. John Shegerian: And which college was this at? Rob Harmon: Hampshire College in Western Massachusetts. John Shegerian: Western Massachusetts. OK. That’s awesome. So you really had the bug very young. Rob Harmon: Really young and I built my whole career around it. So it’s all I’ve really got. John Shegerian: And so you’re a Brooklyn homeboy? Rob Harmon: South side of Chicago and then Brooklyn. John Shegerian: Which are two cities and two areas of this country that are on fire for green right now and sustainability. RG: That’s right. John Shegerian: That is just great. So going back to where we are today at the GoGreen conference here in beautiful downtown Seattle and this MEETS Coalition, which you are the Director of. And for our audience members out there that want to learn all about Rob and his colleagues’ great work, you can go to www.MEETSCoalition.org. What are you doing at MEETS, and explain the interrelationship of your job at MEETS and also EnergyRM and how they interrelate and how you’re really helping change the world and make it a better place. Rob Harmon: Well, EnergyRM – the technology company that I run right now – provides the energy efficiency meter that is the underpinning for the transaction structure. John Shegerian: Got you. Rob Harmon: And when I came on to serve as the CEO, the idea was that EnergyRM was going to be the development company with a meter that did all these developments. And what we discovered of course very early on as we moved through it was that you couldn’t really be the meter company and the developer, because nobody is going to buy stuff from you if you’re telling them how much they’re going to buy. So what we decided to do was to separate the meter company from the folks working on the transaction structure. At the moment, I’m wearing both of those hats and we’re working through – in the early days you’ve got to wear multiple hats – but the idea here is that the MEETS Coalition structure is much more of a nonprofit structure where we’re educating people around the transaction structure that’s why it’s a .org. John Shegerian: Yeah. Rob Harmon: And EnergyRM is really a straight up technology company. John Shegerian: That sells technology for a profit. Rob Harmon: It’s a SAS company. Software and service. It’s all in the cloud. John Shegerian: Talk a little bit about energy utilities. What is broken with the model, and why is your model better? Rob Harmon: Well, really nothing was broken about them for a really long time. It’s important to understand the reason we set them up was to electrify the country, and we started this probably about 100 years ago. When we were doing that, there weren’t that many people, but the population was growing fast and there was an awful lot of resource so we put incentives in place to make them go and extract resources and burn them and build a whole bunch of power lines and electrify the place like crazy because there was this great correlation between extracting resources and improving the quality of lives. John Shegerian: Right. Rob Harmon: It was a direct correlation based on the more you can dig up and burn the better it got for everybody, right? John Shegerian: It’s all about speed and growth. Rob Harmon: Well, that’s right and that works really well when you have a relatively small and growing population and you have a lot of atmosphere or a lot of resource. John Shegerian: Right. Rob Harmon: When you start running out of the atmosphere’s ability to absorb all of that and you have a big huge population, those incentives get you the wrong outcomes, right? John Shegerian: That’s right. Rob Harmon: They don’t get you the outcomes you want, and so what’s happening now – we’re beginning to see everywhere now – is that the rapid extraction of especially fossil fuel resources the faster you extract those now the lower the quality of life. John Shegerian: Right. Rob Harmon: It’s going the other direction. But all of the incentives are still 100 years old, right? So it wasn’t set up wrong to begin with – it was set up right to begin with – now we just need a different set of outcomes. John Shegerian: We need to shift the paradigm. Rob Harmon: Well, we do. And the problem of course is that people are used to the old incentive structures, and actually, it functions kind of like an addiction. “Well, this is the way we’ve always done it.” “This doesn’t hurt me.” “I’m only doing my little part.” It kind of has some similarities to addiction. And what happens is now that the regulators are saying to the utilities, “We want more energy efficiency out of you.” What they’re saying is, “But wait a minute – if this scale, we’re selling half the units we’re selling now, how do we survive in that world? If we’re not building power plants and we’re not building big transmission lines, which is where we make all our money and our unit sales are going away, I thought you guys wanted us to be around to give you electricity and stuff,” you know? So we’re at this kind of train wreck place. So what we did with MEETS, which is the Metered Energy Efficiency Transaction Structure. John Shegerian: OK. Rob Harmon: Nickname. That’s why we call it “MEETS” because that was way too long. John Shegerian: Right. That’s good. I’m glad you framed that out. Rob Harmon: But the idea here is that building analytics and software is finally good enough that you can build the piece of technology that the EnergyRM team built. John Shegerian: OK. Rob Harmon: And what it does to keep it sort of at a very high level. John Shegerian: Yup. Rob Harmon: What it does is it meters the difference between how a building would perform or did perform pre-retrofit. John Shegerian: OK. Rob Harmon: And how it’s performing after the retrofit. John Shegerian: OK. Rob Harmon: How it’s performing after the retrofit is pretty easy because you have the utility posts, right? John Shegerian: Right. Rob Harmon: So what you’re really trying to do is maintain an algorithm that tells you how the building would have performed had it not been retrofit, which is really not as hard to do as you think it might be. So I’m not going to get into all the details. John Shegerian: No, no. Rob Harmon: But essentially, think about it this way. If you have that upper line, which is how the building would be performing if it hadn’t been retrofitted. John Shegerian: Right. Rob Harmon: And you now have the new utility bills, all you have to do is subtract one from the other and you know how much energy efficiency you are getting. John Shegerian: Wow. Rob Harmon: What happens now is you have another meter reading on the building. Your first meter reading is the normal utility bill. John Shegerian: Right. Rob Harmon: Your second meter is how much energy got saved. John Shegerian: Wow. Rob Harmon: And they are both measured in the same units. Let’s say kilowatt hours for electricity. What happens then, because you are metering it, you can start to transact on it as a real thing. So normally what we do with energy efficiency is we say, “Hey, we’d like you to install energy efficient light bulbs; here is five bucks. Why don’t you go do it?” and then we kind of hope you do it after we gave you the five bucks. John Shegerian: Right. Rob Harmon: Maybe you put it in a closet and you never turn it on. We’re not metering any of that usually, right? John Shegerian: Right. Rob Harmon: So what this does is it allows the utility to see on a meter how much energy efficiency the building is producing. John Shegerian: Wow. Rob Harmon: And there are two big problems with the energy efficiency paradigm today. One of them is what’s called “split incentives” and what that means is, let’s say you own a big commercial office building and it’s full of tenants and they pay the energy bills. That’s the way it usually works, right? John Shegerian: Right. It’s a pass-through. Rob Harmon: So now some guy comes to you and he wants you to upgrade your building because it’s the right thing to do, right? You say, “OK, so I’m going to go borrow a million dollars and my tenants’ energy bills are going to go down. How do I pay back the million dollars?” and the answer, of course, is “Well, you can’t,” so you don’t do anything, which is the reason that all the commercial office buildings in America – the vast majority of them – are really, really energy inefficient. John Shegerian: Got you. Rob Harmon: Because there is no investible proposition, because the tenants’ bills go down so the tenants get all the benefits of better lighting and all that stuff and their energy bills go down and then a year later they leave and they don’t care anyway. The tenants in the buildings, they’re trying to make coffee or run a law firm. John Shegerian: They’re transient. Rob Harmon: They’re transient and they have another business they’re paying attention to. John Shegerian: Right. Rob Harmon: And their energy bill in the commercial office building is a very small portion of their operating expenses. John Shegerian: That’s the noise to their core business. Rob Harmon: Exactly. So oddly, what we’re doing in the current transaction structure is we’re giving them all the cash flow even though they don’t care and we’re taking the cash flow away from the investors and the building owners that we would need to pay back the loans that we used to upgrade the building so no wonder it doesn’t work, right? John Shegerian: Right. Rob Harmon: And at the same time the utility is seeing the energy bills fall and all their units go away. So you’ve got two pretty broken things here. So utilities are having a hard time liking it. Even the regulators want them to do it, so they do what the regulators tell them. John Shegerian: The landlord is not all that happy. Rob Harmon: Well, that landlord doesn’t really care because the tenants are paying the bills and he is not going to borrow the money and the tenants don’t really care. That’s kind of broken. So what we did, because we can meter the energy efficiency, we take that meter rating and we deliver the meter rating of the energy efficiency in kilowatt hours to the utility. John Shegerian: Got it. Rob Harmon: The utility then takes that meter reading and says to the tenants in the building or the building owner, “You now have two meters on your building. One of them is the energy we’ve delivered to you in kilowatt hours and the other is the savings in kilowatt hours.” John Shegerian: OK. Rob Harmon: If you add those two together what you get is the old energy bill for the building. John Shegerian: Right. Rob Harmon: Savings plus current use is the old use. John Shegerian: Right. Exactly. Rob Harmon: And all of a sudden two things happen. The utility no longer loses revenue because they are charging the building for both things. So they are charging the same amount to the building that they’ve charged before which means that they don’t have any lost units in the system and they don’t have any lost revenue so the utility is happy. John Shegerian: They’ve been made whole. Rob Harmon: They’ve been made whole. The other thing that happens is you have all this cash now that is in the transaction because the utility just collected it all. It didn’t go away. John Shegerian: Right. Rob Harmon: So the utility then takes a chunk of that money and maybe some incentive money they have because now they have an extra kilowatt hour they can sell somewhere and they combine those numbers in some fashion that they are comfortable with into what they call a “power purchase agreement” which is the way they buy energy from wind farms and gas plants and nuclear power plants and other things. The way utilities tend to transact on buying energy is either with facilities they own or facilities that they contract with in the public sphere. So what the utility can then do is sign a power purchase agreement for energy efficiency. And what we did here in Seattle with Seattle City Light and the Bullitt Center was we put together a 20-year power purchase agreement between the Bullitt Center – and actually it was the Bullitt Foundation who was the investor – and Seattle City Light. So the Bullitt Foundation, which ponied up all this money to make the building greener, now has a 20-year stream of revenue coming from Seattle City Light – very credit-worthy enemy – to repay those loans. And the tenants get this astonishingly beautiful space and they pay the same energy bills they’d pay in a regular space so, what, no one cares, right? John Shegerian: Right. Rob Harmon: So all the cash flow gets restored, the utility remains whole and the investors have a 20-year stream of cash flow to repay the investment. You have now basically taken the model we’ve used to build power plants for 100 years, and you have used that model to transform the energy market again. The utilities use this model to build all this infrastructure and now we’re going to let them use the same model to transform the infrastructure into green infrastructure. John Shegerian: That’s amazing. Rob Harmon: It’s marvelous. John Shegerian: So you’ve done that here at the Bullitt Center? Rob Harmon: Mmhmm. John Shegerian: A couple of questions. Is this now the new paradigm, and now can you take this nationally? Can you take the show on the road? Rob Harmon: Well, the reason we have the MEETS Coalition is because there are people all over the country who are interested in trying to do this, and what we want is to be able to get them all the information. It took a long time to do what a colleague of mine calls “running the pipe cleaner through the transaction structure.” I mean you have got to have a meter services agreement. You have got to have a PPA contract – power purchase agreement contract. John Shegerian: Right. Rob Harmon: You have got to have agreements between the investor and the building owner. All this paperwork. And when you do it for the first time. John Shegerian: Not easy. Rob Harmon: It’s not easy. I have now done three things in my career that people told me couldn’t be done. John Shegerian: Yes. Rob Harmon: Every one of them takes three years to do the first one, right? John Shegerian: Right. Rob Harmon: Once you’ve done the first one and kind of look at it and kind of photocopy, it it goes much faster. John Shegerian: Right. Rob Harmon: So we’ve penned this deal and it’s underway. John Shegerian: OK. Rob Harmon: And people around the country have been calling in saying, “How do I participate in this? How do I learn more? How do I get the documents? I don’t want to write this thing.” John Shegerian: Recreate the wheel. Right. Rob Harmon: And I have a four-year-old son. I don’t want them recreating the wheel. I want them to do this as rapidly as possible. John Shegerian: Right. Rob Harmon: So we created the coalition around the idea that this information – the coalition is to cover its own costs, but it is not designed to make a profit. John Shegerian: Right. Rob Harmon: So the idea is that people can join. They get all the materials. They get some access to the people who know stuff about how MEETS works, etc. It’s kind of like going to a conference but you’re in it for the whole year. John Shegerian: That’s awesome. So what is the next step? What does the future hold now? Rob Harmon: Well, it will be really interesting to see what happens now as the deal rolls out. I have been very focused over the last couple of years on getting this deal right and I really have found that you can waste a lot of time in your life. I have old stories I could tell you, which we don’t have time for, about how when you’re doing something like this you can get too spread out. So I get very, very focused when I work on stuff like this and now that the deal is underway I think what we’re going to start doing is demonstrating to people in other places how they can do the deal the same way. So we are in the “OK time to go, show time” phase of the game, and we are really looking forward to that. John Shegerian: Now the Bullitt Center was a new building. Rob Harmon: Yeah. John Shegerian: It’s going to work on new buildings. Rob Harmon: Yup. John Shegerian: Will it also work on retrofits of older buildings? Rob Harmon: Yes. In fact, it was originally designed to work on retrofits of older buildings. We chose the Bullitt Center because there were fewer moving parts, basically, and if you want to clean out the transaction structure, you don’t want to be waiting on the utility to agree to the transaction structure while somebody is waiting to do construction. John Shegerian: Right. Rob Harmon: So the construction was already underway, and we were really just contracting around how the energy efficiency gets paid for. In a retrofit, it’s actually to some degree easier because once everybody is clear on the transaction structure, it’s easier because you already have the energy data from how the building used to perform. You know how the building performed in the past so you can project that information forward dynamically – that’s another complication of this. John Shegerian: Got you. Right. Rob Harmon: You can project that forward and then it’s really obvious the difference between what the utility used to have to deliver and what the utility is currently delivering after the retrofit. So all you’re doing is metering the difference between the old building and the way the old building would have kept performing and the new building. John Shegerian: What are the odds that this thing becomes the new paradigm that goes national and beyond in the coming years? Rob Harmon: Well, that’s a great question. What we’re seeing is we’re seeing two things. We’re seeing utilities and regulators getting concerned because they’ve already given away all the light bulbs. How do they get more energy efficiency, right? So they’re running into those problems. The other problem is that a couple utilities are losing nuclear power plants. Being nuclear power plants, how do you replace that power? Well, you can’t build a fossil facility near a population anymore. People won’t let you do that anymore. John Shegerian: Right. Rob Harmon: So how do you replace that? You can’t replace all of it from far away because you need some support locally. So if they can meet that power need from efficiency at scale, then they don’t need to build the next power plant. John Shegerian: Got you. Rob Harmon: Right? John Shegerian: Got you. Rob Harmon: But you can’t do that giving away light bulbs. You’ve got to do it by retrofitting these buildings deeply. John Shegerian: Right. Rob Harmon: Which is of course exactly how you get more jobs; it’s exactly how you free up more energy stability for your economy; it’s how you lower rates over time. There are all kinds of other benefits to it, and it just hasn’t been possible up to now because we haven’t been able to meter the energy efficiency. Now that we can meter the energy efficiency the world is our oyster. John Shegerian: Sky is the limit. Rob Harmon: Sky is the limit. John Shegerian: Sky is the limit, and that is a great ending for our visit with Rob today. Rob, just very inspiring stuff. For all of you that want to learn more about the MEETS Coalition and this new paradigm that Rob and his colleagues have created, please go to www.MEETSCoalition.org. You know, Rob, you are an inspiring sustainability innovator and truly living proof that Green Is Good. Thank you for being with us today. Rob Harmon: Thank you. John Shegerian: Thank you.