Skip to main content

THE Successful Model for Pay for Performance

By March 10, 2021September 9th, 2021Energy Rant
pay for performance

Livin’ it Up in Hotel California

I’ve written about pay for performance (P4P) programs no less than six times in this blog. I’ll start with a recap of those posts and move the ball forward once again. We’re well within field goal range!

In Tooling Pay for Performance, I wrote that energy models and dashboards with regression models showing savings performance or lack thereof provide the following Leatherman-like benefits.

  • It provides leverage with visual evidence, so customer stakeholders do more and climb higher.
  • It’s a vise-grip to maintain what was accomplished.
  • It’s a hammer to “persuade” folks.
  • It’s a screwdriver to drive continuous improvement.
  • It’s a scissor (cheese alert) to cut waste.
  • Finally, it’s a measuring stick to verify performance.

In Slick Willy Sutton, I wrote that program delivery contractors will go where the money is – large population centers and large facilities for the commercial and industrial sectors.

Pay 4 Performance Sequel notes the flip side of Slick Willy: there is no reward for equity, and implementation contractors carry major risk due to the whims of third-party evaluators.

Prospects for Peril in P4P described more issues with P4P, namely frivolous program restrictions such as disallowing bundling of measures with disparate ROIs aong with M&V and project development cost risks.

In Performance Based Programs – Delusion? I explained some solutions to the above with bundling projects (frivolous restrictions die), simplifying the customer experience, and deep savings for large C&I – essentially the reverse of issues discussed in earlier posts.

Performance Programs and Ouija Boards included enhancements to P4P programs like electrification, financing, and rolling in non-energy benefits.

Every Silo for Itself

Commercial and industrial portfolios include a menagerie of programs. A large energy user can participate in most programs, including custom efficiency, prescriptive, strategic energy management, retro-commissioning, and new construction. If each of those programs are set up with the P4P model, there will yuge amounts of lost opportunity and cross-selling. If I’m delivering a P4P new construction program, I’m not going to spend time asking the customer about issues and opportunities in their other buildings. I’m not incentivized for that. I wouldn’t look at or ask about those buildings.

The same would apply to the other programs. You have many silos stalking confused customers, thinking what the hell is going on here? My utility or portfolio has a dissociative disorder.

Program administrator “best practices” include a united front to customers – i.e., customers are assisted by one entity with one brand rather than being attacked by a mob of silos. In fact, customers shouldn’t even know what program they are using.


The solution is to pack all services under one P4P contractor. Anything that requires analysis and planning, including strategic energy management, studies, new construction, and retro-commissioning, become the sole domain of the P4P contractor. The P4P contractor becomes the goto expert for all things energy: efficiency, demand management, electrification, fuel optimization, high bills, and more.

The large-user P4P contractor becomes an aggregator of all the various programs and a feeder to customers as the sole expert. It’s like the Hotel California for customers: they can never leave. The P4P contractor can have several subs specializing in those areas of, uh, expertise. Customers not served by the P4P contractor have access to the other programs as usual. Some utilities are kind of moving in this direction, but with not enough gusto.

P4P DiagramGetting More of What is Rewarded

People and organizations need to be incentivized and accountable for hitting their metrics or key performance indicators. This cannot be done optimally or even effectively, by mixing P4P and equity. If administrators want equity, reward that by setting up KPIs for hard-to-reach small businesses, first-time participants, and other criteria. Focus.

The P4P contractor should have access to the entire customer base so they can cross-sell and direct customers to the appropriate programs without the customer knowing it necessarily. The P4P contractor can have performance metrics with each of the subs. Subs can get incentives for referrals to other programs. The sky is the limit.

As the administrator, I not only want low-cost resource acquisition (savings), I want a lot of it[1]. So I would set up block savings payments, something like the following table, assuming a savings target of 50 GWh. As the implementation contractor, I want to blow through that first 80% of savings to get into the real money. When I hit the target, I get a nickel bonus on all savings to the goal: $2.5 million.

kWh SavingsIn these times of declining reliability and periods of extreme pricing, it would be grand to add peak kW reduction to the formula as well.

Go For it or Stay Home

Some things are like a keystone bridge or arch. If you don’t have all the pieces, the entire structure fails. One time we were pitching a utility-run performance contracting program that included key elements: guaranteed positive cash flow, utility financing (or a third party through the utility), and on-bill payments. That was nearly a keystone program. If any of those components were left out, the whole thing would bomb like a car missing a wheel. Moral of the story: go for it or stay home.

[1] Regulatory policy needs to be in place to promote this, but that’s another topic for another day.

Jeff Ihnen

Author Jeff Ihnen

More posts by Jeff Ihnen

Leave a Reply