Report originally published here.
Energy efficiency and renewables represent the most promising pathway to lower energy costs for individual consumers and utilities. Programs that help utility customers pursue home improvements, like better insulation or rooftop solar panels, can slash monthly utility bills and eliminate the need for utilities to add costly — and outdated — power and gas infrastructure. The upside is undeniable, with energy efficiency measures alone predicted to save customers $2 trillion by 2030. But limited access hinders progress. The best energy efficiency programs serve less than 2% of customers each year, and few reach the majority of a utility’s customers, including renters, customers without strong credit, and low- and moderate-income households, who pay disproportionately high energy bills.
Utilities can knock down major barriers to energy efficiency and renewables by allowing customers to make site-specific investments and recovering utility costs through an opt-in tariff. Tariffed on-bill programs are often referred to as inclusive financing because they allow all utility customers the option to access cost effective upgrades. Inclusive financing solves many of the problems dogging the push for a more sustainable, affordable, and equitable energy economy because, unlike loan-based programs, tariffed on-bill programs are open to all customers regardless of their income, credit score, or renter status.
When a utility supports energy-savings efforts by offering to invest in upgrades rather than offering traditional debt financing, there are five major benefits:
- Immediate Savings — well designed on-bill programs result in energy savings that deliver bill savings each year from the beginning.
- Universal Access — unlike debt-based financing programs that don’t serve customers with lower credit scores, inclusive financing programs serve all customers regardless of income, credit score, or renter status.
- Simplicity — with no loans to customers, inclusive financing makes investments in energy efficiency and on-site renewable energy much easier to access through utilities that can recover costs on the monthly bill.
- Bigger Savings — customers tend to accept energy improvement projects that are twice as big when offered inclusive financing with a tariff agreement compared to a personal loan.
- Low Risk — utilities that offer inclusive financing report charge-offs that are less than one-tenth the national default rate for unsecured consumer loans.
A Huge Opportunity
The opportunity to reduce energy consumption and related costs by boosting energy efficiency and renewables is staggering.
By 2030, the U.S. Department of Energy estimates, a mounting push for efficiency will reduce energy use enough to slash electricity customers’ bills by $2 trillion. Residential customers alone may see as much as $15.4 billion in savings by 2030 in the northeastern U.S., with individuals owning energy-efficient homes cutting their bills by 25 to 35 percent over 15 years.
Rooftop solar can help reduce costs, too. If the maximum number of residential and commercial rooftops were covered with panels, it could cut residential electric bills by over $72 billion and commercial bills by $58 billion, based on average retail electricity prices. The individual savings are significant, too. In Minnesota, for example, a homeowner can generate between $13,000 and $28,000 over 20 years with rooftop solar.
The benefits multiply when the calculus factors in benefits to the energy system. Lower on-site use and higher local energy production reduce demand, translating to a longer life for existing distribution and generation infrastructure and reducing the need for new power plants.
The upside presented by energy efficiency and distributed renewable energy is stoking an appetite for communities to maximize these financial and wider economic benefits, and to distribute them widely. Boulder, CO, has sought to take over its electric utility and amplify local public benefit. Minneapolis, MN, forged a unique partnership with two utilities to advance its Climate Action Plan, tailored to promote a clean, local, equitable, and affordable energy future. It’s likely only the beginning.
Challenges to Reaching Most Customers
Many cities, like Minneapolis, have ambitious goals for reducing energy use. The Minneapolis Climate Action plan sets the goal of reaching 75% of single- and multi-family customers with home energy services by 2025. With about 10% already served by existing programs, approximately two-thirds of electric and gas customers must be reached in the next 10 years to meet the goal.
Overall, even in the best efficiency and renewable programs, only about 1-2% of customers take advantage of energy savings opportunities each year. Information on many programs is limited to bill inserts or marketing that may fail to reach many customers, especially low-income customers. One California study, for example, found utilities had trouble reaching customers “that were non-white, lower-and middle-income, non-college educated, or non-English-speaking.” Even when the message reaches customers, the complexity of identifying contractors, finding financing, or enduring work on their property becomes an insurmountable barrier.
Low-income customers are often shut out of programs even though they shoulder the heftiest utility bill burden. In fact, those households spend up to three times as much of their income on energy charges as their higher-wage counterparts. The trend persists even when energy prices sink, because low-income customers tend to live in older, less-insulated homes. For example, households in Minnesota’s Hennepin County (which includes Minneapolis) whose income falls below 50 percent of the federal poverty level spend an average of 29.2 percent of their earnings on energy costs, well beyond the 6 percent threshold that is considered affordable. That’s nearly $2,050 per year.
Meanwhile, the gulf is widening between what is considered affordable and what Minnesotans (and residents of other states) actually pay for energy. The gap grew from $652 million in 2011 to $675 million in 2015, according to national research firm Fisher Sheehan & Colton, an energy affordability watchdog. Just bringing the homes of low-income residents up to the average level of home efficiency in the U.S. would help them enormously, reducing energy costs by one-third.
Due to the stratification of income in the U.S. by race, bringing the homes of low-income residents up to the average level of efficiency would particularly reduce energy burdens for people of color. “For African-American and Latino households, 42 percent and 68 percent of the excess energy burden, respectively, would be eliminated,” says one report.
The following graphic illustrates the swath of population typically unable to access loan-based efficiency or renewable energy programs — renters and those with subprime credit — but who can be served with tariff-based financing.
To get there, the status quo is not sufficient. Existing programs aren’t reaching a majority of the customers, and persistent barriers to participation – like cash requirements to access rebate programs or willingness to take on debt for loan programs – affect market segments that extend far beyond low-income households.
A Necessary Paradigm Shift
For decades, most U.S. electric and gas utilities have operated as monopolies, with revenue rooted in building new infrastructure and selling more energy. Regulators tend to defer to utility plans for the electric and gas grids — plans that have only modestly shifted from the historic priority to build more and sell more.
Last century’s business model no longer works in an economy where customers have more choice in the energy they use — by supplanting utility electricity with rooftop solar, for example. Energy efficiency standards have dramatically lowered the energy consumption of large appliances, and technology advances have reduced power consumption as well as the size of many electronic devices.
From smartphones to solar, the onslaught of new technology has reconfigured how Americans view energy use and consumption. It’s also flipped the calculus of utility companies in meeting energy supply. The crux of this new paradigm is that the cheapest new energy supply is energy saved through conservation and efficiency, not expensive new generation. The following chart illustrates the cost of procuring new kilowatt-hours of electricity from energy efficiency compared to new power plants.
The economics of energy efficiency and renewables permeate the marketplace. For every $1 invested in efficiency, utility customers see between $1.24 and $4.00 in benefits, including smaller bills and avoided expenses tied to building new infrastructure. That frees up substantial savings that can be spent elsewhere, stimulating the local economy.
There’s also ample evidence that distributed solar provides more value to the grid that its producers receive in compensation. Minnesota’s “value of solar” formula, for example, has consistently offered a higher price for solar — based on its value to the grid and society — than producers receive if they simply received bill credits based on the electricity produced.
Utilities can and must embrace a new way of doing business that favors energy efficiency and renewables, starting with a tool that enables all customers to choose lower energy costs.
A Powerful, Universal Tool: Inclusive Financing
Since debuting more than a decade ago, an inclusive financing strategy — using tariffed on-bill investment programs — is steadily taking hold in multiple states around the country. Since on-bill programming in New Hampshire won regulatory approval in 2002, programs in Kansas, Kentucky, Arkansas, California, and North Carolina have followed. Other states and utilities are exploring such initiatives.
The program requires either the utility or a private investor to cover the upfront costs of qualifying energy improvements to homes or buildings. The utility recovers the costs on utility bills for the location, at a rate that is less than the estimated savings these improvements will produce. Charges that recover the cost of the upgrades over time appear as a line-item on customers’ monthly bills, simplifying the cost recovery process and increasing transparency.
Well-designed tariffs set up a system where whoever pays for the utility bill at a home or building also pays for — and directly benefits from — the more efficient home or rental unit.
Under the terms of this opt-in tariff, customers carry no lien or debt associated with their improvements. Assuming no other changes in energy consumption habits, they get immediate net savings on their electric and/or gas bills, plus a more comfortable and sustainable home. If the upgrade (like a new furnace) fails and is not repaired, they don’t make payments until it is repaired.
Roanoke Electric, based in North Carolina, runs one of the existing programs. It initially sought to cut customers’ energy costs with improvements financed using loans, but that model required customers — many with low incomes and shut out of traditional financing — to receive loan approval and take on debt. Roanoke contacted 1,000 of its customers about the program, and more than 100 signed up, but fewer than 10 were ultimately able or willing to secure the loan.
The utility has since implemented a tariffed on-bill investment program based on the Pay As You Save® (PAYS®) framework, which is demonstrably more effective and has served many of the customers unable to participate in its loan program. After changing the financing model, the utility reports, customer interest — and results — gained substantial momentum.
The capital for energy-saving or energy-generating improvements can come from the utility itself or from a third party. In general, utilities can source capital for making loans or tariffed investments from private capital markets or public financing facilities.
Stitching tariffs into energy efficiency programs was a relatively novel idea in 2002 when New Hampshire introduced a pilot initiative that seeded permanent on-bill programming. After years of refinement and field data, the framework was recognized in a 2014 report as a potential “game-changer” because of its potential to deliver robust security and overcome a range of barriers to efficiency beyond upfront costs. Renters can participate, municipalities can participate without a public vote, and customers can participate without taking on new debt. Also, tariffed on-bill programs remove barriers for customers unable to risk that upgrades could fail (and stop producing savings) during the cost recovery period. They also address barriers for customers that cannot bear the risk of higher near-term costs in exchange for long-term savings because they lack the extra income.
Of the 30 on-bill programs examined in the 2014 report, 10 offered line-item billing and 13 offered on-bill loans, while just seven leveraged on-bill tariffs (and confusingly, some of those still use loan financing). For a breakdown of information on those programs, see the appendix to the Financing Energy Improvements on Utility Bills from SEEAction.
Investor-owned, cooperative, and municipal utilities can all implement inclusive financing for energy-saving improvements. Each of these types of utilities is represented among the seventeen utilities that have or are offering programs in seven states. With a tariff on-bill investment program, the utility owns the improvements until it recovers the cost through a site-specific charge on the bill, then the building owner takes ownership at no additional cost. Because tariff ties the investment to the meter and not an individual customer, the payments and upgrades apply to both the current and successor occupants of a given property until the utility’s costs are recovered.
Tariffed on-bill programs remove barriers for customers unable to risk that upgrades could fail (and stop producing savings) during the cost recovery period. They also address barriers for customers that cannot bear the risk of higher near-term costs in exchange for long-term savings they lack the extra income.
As a condition of participation, utilities can require customers to keep the upgrades operational. Those pursuing more efficient air conditioning systems, for example, are responsible for changing filters. Some utilities offer a service agreement that can be included with the upgrades so that annual maintenance for HVAC systems is assured.
The terms of the tariff can also address the potential for equipment breakdown during the period of cost recovery. If new energy-efficient equipment stops working or underperforms, the customer can notify the utility or its program operator, which suspends charges for cost recovery until the utility — likely through the contracted installer — determines why it failed and a plan to fix it. This provision in the tariff protects customers, and the risk for utilities is also low when eligible improvements include proven technologies installed by certified contractors.
There are a range of options for implementing tariffed on-bill programs. Not all of them improve access for traditionally under-served customers. If properly designed, however, tariffed on-bill programs can deliver immediate cost savings, allow near-universal participation, remove financial and non-financial barriers, and provide deeper energy and cost savings than traditional energy savings programs.
Have a tip for CleanTechnica? Want to advertise? Want to suggest a guest for our CleanTech Talk podcast? Contact us here.
CleanTechnica Holiday Wish Book
Our Latest EVObsession Video
CleanTechnica uses affiliate links. See our policy here.