Scaling Up Home Energy Investment — Episode 199 of Local Energy Rules

Matt Flaherty:

If you don’t have the savings to just simply buy those types of upgrades outright, some of which are pretty expensive – the average, I think, heat pump installation job right now in the U.S. is something like $14,000. We’re talking about considerable amounts of money that the vast majority of Americans simply don’t have to make these types of investments. If you don’t have that funding to overcome that upfront cost on your own, you’ve got to look to other solutions. Maybe it’s governmental funding or rebates, maybe it’s financing of some kind. And what the data in the field show is that all of those other solutions really face persistent barriers. The funding for no cost programs for lower income residents in particular are essential and crucial, but we have never, ever in this country been able to match the scale of the need, not even anywhere close to it.

John Farrell:

What if you could get new insulation, rooftop solar panels, and a high efficiency water heater with no upfront costs and no credit check? In the past decade, a few utilities have started offering so-called Inclusive Utility Investment Programs that recover the cost of these investments using the energy savings they provide to customers. Access is more equitable and often the scale of investment is larger than programs that rely on individual customers to find the money to make their own upgrades. Matt Flaherty, director of building decarbonization at Clean Energy Works joined me in December, 2023 to discuss why inclusive utility investment can work well and where it’s catching on. I’m John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance and this is Local Energy Rules, a podcast about monopoly power, energy democracy, and how communities can take charge to transform the energy system. Matt, welcome to Local Energy Rules.

Matt Flaherty:

Thank you so much for having me, John. I’m happy to be here.

John Farrell:

Matt, I love to start off just asking people how did they get into the work that they’re doing? Most of the people who are coming on are of course working on clean energy like I am, like this podcast is about. So how did you get here? What is your path to and your motivation and your interest in working on clean energy?

Matt Flaherty:

Sure, yeah, my background, I’m trained as an engineer and a lawyer and used to practice law in Chicago for a bit and frankly my twenties didn’t find a lot of satisfaction in those careers. I was in the private sector and realized I really wanted to have some social impact. I think I had read Naomi Klein’s book This Changes Everything sometime around 2015 or 16 and decided it was time to go back to school to really work on policy climate policy in some way. It was a motivating issue for me and I was lucky at Indiana University to find a mentor in Dr. Sonya Carley who is now at the Climate Center for Energy Policy at University of Pennsylvania but runs the Energy Justice Lab. So I was a researcher with the Energy Justice Lab, had a focus in energy policy when I was there and got really motivated by the energy corner of the climate field for the making a difference there. I also saw it impacting my community locally. I got more involved in advocacy around housing, around transportation issues, eventually leading me to run for city council, which I serve on here in Bloomington Indiana. And so I saw the intersectional nature of the energy justice work with other aspects that I cared about in my community and working on. And so after graduate school I worked in climate policy at large, more on the local government technical assistance side in Indiana and the Midwest, which is a really nice broad base to have before transitioning back directly into the energy field and working on energy justice in the context of distributed energy solutions and building decarbonization specifically.

John Farrell:

Awesome. I love hearing that path and I just also really appreciate even if you didn’t find satisfaction necessarily in using your engineering and law degree or studies early in your career, I just think it’s so useful to have people who have experiences like that to bring into the clean energy space and that perspective, which can often be missing among climate clean energy advocates. I mean I had a math major, but I certainly focused a lot more on the politics and policy side and really appreciate people who come with some of those other perspectives. I just want to start off then perhaps people who are listening to this podcast already have heard of inclusive financing or Inclusive Utility Investment or maybe the branded version of this Pay as You Save, but would love to just start with you giving an overview of what is this thing that we call inclusive utility investment? How do you think of it? What does Clean Energy works mean when they say that and what kinds of investments or upgrades to buildings can it support?

Matt Flaherty:

So I would call inclusive utility investment a financial solution that allows utilities to invest in all cost-effective clean energy upgrades at a customer’s site and then recover those costs with a site specific tariff to charge on the customer’s utility bill that is less than the estimated cost savings from the upgrades. So that’s kind of a long definition. The kind of key features are it’s not consumer debt, could think of it more like a utility investing in other capital resources they invest in like power plants, but here they’re investing in site specific distributed clean energy upgrades and have regulated cost recovery. Again, one of the hallmark features of the policy design is having net estimated savings for the customer so that they enjoy a modest bill savings from the start including as well as other benefits, like a more comfortable home for instance, when you’re investing in efficiency improved HVAC. And then once that cost recovery and the utility side is complete, ownership of all the assets fully transfers to the participating customer and they enjoy the full energy cost savings from those clean energy upgrades in an ongoing fashion.

And so that’s the basics of the policy solution. You mentioned the Pay as You Save system, which is a trademarked and branded program design, which really pioneered this type of policy solution. It really is something kind of fundamentally different. Mostly what we see are either direct funding or some sort of consumer financing, and so that fundamentally different characteristic of utility investment, utility regulatory policy allows the design to overcome some really persistent and challenging barriers to access to the benefits of distributing clean energy upgrades. And so we can get into some of those barriers that they overcome and the performance potential and scalability of the solution maybe in future questions.

So I’ll pivot just to the other portion of the question you asked, which is what types of investments or upgrades can it support? I would say really any distributed clean energy upgrade that has cost effectiveness or savings potential that can come in the form of bill savings because of energy efficiency measures like installation, air ceiling, duct ceiling, higher quality and more efficient HVAC heat pumps, heat pump water heaters, but it can also extend to distributed solar generation, storage, bidirectional EV chargers that allow a benefit stream to be captured and utilized by the utility to invest in the infrastructure that a customer needs.

So the solution space is traditionally energy efficiency and HVAC, but the more that we live in a world where the value of distributed resources is being recognized, the potential solutions really expand in terms of the types of measures that you can invest in. So I would say efficiency, HVAC, storage, distributed generation, those categories.

John Farrell:

That’s a lot, which is wonderful. Well, let’s talk a little bit about where inclusive utility investment policies have been adopted in recent years. How many people across the United States have access to this tool that can make it much simpler to get access to clean energy investment?

Matt Flaherty:

Sure, good question. I think a couple of things I want to share as well for context and reference is that people might know this policy solution by other names. It used to be or is sometimes called tariff on bill financing, which is a reference to the utility tariff that governs the terms of the utility’s investment and cost recovery. Sometimes people refer to on-bill financing or inclusive financing sort of writ large, but the movement towards inclusive utility investment as a term is something that’s embraced by EPA Energy star Home upgrades program and really points to the key attributes of the policy design that distinguish it from traditional debt-based consumer financing, so that utility investment piece and the inclusion that comes with that. So that said, if you’ve heard of tariff on bill or heard of Pay as You Save, those are other words that are either another term for inclusive utility investment or a specific branded version.

And so the history of the solution has really been in the electric cooperative space. So this originates and has been pioneered and innovated on by the energy democracies that really exist all over the country, but especially in the Midwest and Southeast is where we’ve seen these solutions take off over the last few decades. More recently there’s been a lot of momentum to scale this to the investor-owned utility world, so that has included all of the investor-owned utilities in Missouri developing programs over the last year. Plus they’re also looking at the possibility of a state-based program that would bring in municipalities and cooperatives as well. Illinois with its Climate and Equitable Jobs Act in 2021 called for a program to be developed. They called it an equitable energy upgrade program and Clean Energy Works has participated as a subject matter expert in the workshopping process. They’re going through leading to rulemaking before their commission. There are proceedings underway in California where all of the IOUs in California and one of the community choice aggregators out there, Silicon Valley Clean Energy, are working together in a bill working group to develop a joint statewide proposal by I believe spring 2024. And then just recently in North Carolina, the commission approved new scale program for home energy retrofits and also a pilot for a multifamily new construction in Duke Energy’s service territory in North Carolina. So some pretty significant movement in the last just few years really all around country, but especially again that growth and expansion into the investor-owned utility segment of the utility sector is where I would say that there’s the most significant motion right now.

John Farrell:

I’d love for you to talk a little bit more. I appreciate when you gave the definition, giving some clarity about what are the things that can be done with it and it seems really broad. If I’m a homeowner and I want to save money on my energy bill, I can put in insulation, I could do weatherization work, I can change my HVAC for more efficient systems, whether that’s a heat pump or whatnot. I presume that if it has some energy savings, I could even replace like a gas water heater with a heat pump water heater or an standard electric water heater with a heat pump water heater, I could do solar. Can you talk about what some of the barriers that customers often face in doing these projects typically are overcome with inclusive utility investment?

Matt Flaherty:

Sure, so if you don’t have the savings to just simply buy those types of upgrades outright, some of which are pretty expensive, the average, I think, heat pump installation job right now in the U.S. is something like $14,000. We’re talking about considerable amounts of money that the vast majority of Americans simply don’t have to make these types of investments. If you don’t have that funding to overcome that upfront cost on your own, you’ve got to look to other solutions. Maybe it’s governmental funding or rebates, maybe it’s financing of some kind and what the data in the field show is that all of those other solutions really face persistent barriers. The funding for no cost programs for lower income residents in particular are essential and crucial, but we have never, ever in this country been able to match the scale of the need, not even anywhere close to it.

Even the large influx of additional funding through the bipartisan infrastructure law for weatherization for instance, is still greater than an order of magnitude away from what’s needed on an annual basis to meet the need. On the other side of the coin, you’ve got financing and what some of the folks in the field who have these programs, the inclusive utility investment programs have experienced is that financing still has major barriers. It’s a credit worthiness challenge. There’s a debt aversion component to it. So even when folks have relaxed underwriting criteria, for instance, they might be able to technically access consumer financing. A lot of people still have strong debt aversion. There are other barriers like housing tenure. So if you are a renter or you’re uncertain about where you’re going to live in the next few years, it doesn’t make a lot of sense to take on personal debt necessarily to invest in solutions that might take 10, 15, 20 years for themselves to pay off.

And so all of those things, income, credit worthiness, housing tenure, debt aversion can be overcome by this solution for a few key reasons. One is that it’s not based on an individual’s credit, it’s based on the energy savings potential of a customer’s site. So because it’s based on that energy service and that energy savings, if you have a utility account, you are eligible, you don’t need to have a certain income qualification, you don’t need to have a certain credit, and when the utility makes that investment because it’s investing in the energy services of that home, that residence, the tariff obligation for the cost recovery charges over time that are again less than the estimated savings of the upgrades, it automatically transfers to successor customers because if somebody moves out of that home and sells it to somebody else three years later, the new occupant is also benefiting from those clean energy upgrades and the savings they generate.

And so that feature, that automatic transfer to successor customers, the fact that the investment is tied to the metered location or home and not to an individual customer really has a unique attribute that allows the solution to overcome some of those barriers. I was just mentioning that’s also what allows it to potentially overcome landlord tenant split incentives so renters can benefit. I think probably a lot of folks are probably familiar with the split incentive issue, but I’ll briefly cover what that is. I mean, if you’ve got a landlord who owns a building and is responsible for supplying the HVAC equipment, investing in any efficiency measures, they’re not incentivized to do it necessarily because they’re not the ones who would benefit. They don’t get lower energy bills if the tenant is the one paying the energy bills. On the other side of the coin, a renter doesn’t have an incentive or maybe even the technical ability to invest in improved HVAC or efficiency because it’s the landlord’s building, but of course the tenant is the one paying the energy bills and who would benefit from that.

So by having a utility that can invest in efficiency, it improves the quality of the housing stock that the landlord owns. The savings are what are covering the investment over time and the renter benefits as well. And again, you’ve got that automatic transfer to successor customers with a notice requirement for any new occupant that can really again overcome some of these barriers. So there’s quite a few I mentioned there. Happy to dig, go deeper on any of them, but those are the main ones that I think the solution can overcome.

Actually I will mention one more, which is simply the complications of investing in efficiency and clean energy upgrades in terms of folks navigating the landscape of contractors. What is a cost effective scope of work? How do you know is the work done in a quality fashion? Is there any sort of quality control or assurance? All of that’s incorporated in a sort of turnkey in these programs, so it overcomes that complexity. That can also be a barrier even when folks are motivated to invest in clean energy solutions for their home.

John Farrell:

I’d love to just sort of walk through this for one specific example. So let’s just say I want a heat pump. My gas furnace is old, it’s not terribly efficient, it’s time to replace it. Now in most environments, most utility customers would be in a situation of, okay, I need to come up with the money on my own. So maybe I call the gas company, which often has programs and they’re going to be like, well, we don’t do heat pumps. And then I call the electric company and like, well, we don’t really do direct install of appliances. So then I call my own contractor. Now I go into the yellow pages showing my age here, I go into the internet and I Google HVAC contractors near me and then I find someone who can install the heat pump, which is not always very easy. There are a lot of HVAC contractors who are still skeptical of heat pumps. So there’s that issue there.

I finally find one that will give me a quote or maybe I get multiple quotes and I’m having trouble because partly I don’t understand the differences between the quotes and what they’re telling me. Sometimes contractors are like, well, you need to do it this way or you need to do it that way, and I’m not quite sure how to navigate that. Now I need the money, so I need to go to my bank and get a loan because I don’t have enough savings to do this myself. Or maybe the contractor has some sort of financing program, but the interest rate’s not terribly competitive and I have to qualify with a good credit score in order to get financing in order to do this. So there’s a lot of things there. And then also I have to navigate, maybe there are some incentives from the federal government or the state government or from the utility.

I got to figure all that out and what I hear you saying is the nice thing about this program is number one, I don’t have to worry about the financing because it’s baked into it. If this thing is going to save money that’s going to help pay for the thing that the utility is going to make the investment. So I don’t have to worry about paying back the entire loan if I’m going to move in two years, right? It’s not about that. It’s about whether or not I just think this is a good idea and I can also get some support potentially through programs like these because there’s already baked into it, some kind of assistance in terms of knowledge about what’s a cost effective investment and how do I know that this will actually save me money? Did I cover that alright?

Matt Flaherty:

You did. You really adeptly illustrated the many barriers along the way to navigating these upgrades for a customer, and that’s really probably an underappreciated aspect of the inclusive utility investment approach is that it’s a vastly simplified customer journey and one that can really address those things. So the utility would market the program, if a customer is interested, they would sign up, there would be a truck rolled to their home to do a high quality energy audit and identify what is the cost effective scope of work within the terms of the program, which again require net annual estimated savings requirement. And so the cost recovery charges that you would see on your bill are capped at 80% of those estimated savings annually, and they’re also capped at 80% or less of the estimated useful life of the shortest lived piece of equipment. So let’s say you’re going to get, actually, let’s throw an attic insulation to your example as well, along with heat pump upgrade.

The heat pump might have an estimated life of 15 years, and so that cost recovery term is going to be capped at less than that 12 years, but the insulation’s going to last much longer than that. So those benefits are going to go on and on. But yeah, that program operator is going to identify that cost-effective scope of work for you. They’re going to have a qualified list of contractors already lined up, folks that are willing and able and qualified to install a heat pump for instance. You get to choose as the customer who you want to do that installation. The program operator ensures the quality of the work that’s done. There are extended warranties obligations for repair if there is failure of the equipment and automatic application of any other rebates or incentives that are available. So you don’t have to go apply for those things. They are applied for you to lower the overall cost of the project. You really enjoy a vastly simplified process to get those upgrades as a customer in the program.

John Farrell:

So I’d love to talk to you then about what challenges have faced inclusive utility investment programs. Maybe partly I’m interested in a couple of different things here. One is on the implementation side of, okay, so you’ve gotten your utility to agree. Let’s do this. What challenges do you have in the setup of the program or program design that people need to think about? And then I’m kind of curious then on the consumer side, I hear about sometimes about windows coming up in terms of energy efficiency that they don’t do a huge amount to save energy, so you probably can’t do windows through an inclusive utility investment program or how would that work if I want to spend money on something that has some energy saving benefit but not enough to pay for the whole thing?

Matt Flaherty:

That’s a really good question. Let’s see. I’ll start with the first one of what are some of the challenges that inclusive utility investment programs face in implementation? And so one is a really persistent challenge that is not unique to these programs. It’s true of the whole weatherization universe, which is homes that have health and safety or structural maintenance needs before you can really invest in things like efficiency. Sometimes that’s called pre weatherization investments. So especially in lower income housing stock, you might see deferrals in the program for that reason. It’s something that a few utilities have been able to address through unique programs with philanthropic partners or identifying other resource streams to address things like asbestos remediation or a faulty foundation that needs to be addressed before you can really invest in the efficiency measures. So that’s one thing is deferred maintenance, essentially pre weatherization needs.

I would say another is kind of what you were getting at, which is that not every distributed clean energy solution is cost-effective in every case. And so depending on the measures, depending on the current quality and character of the home, depending on your utility rates, depending on a whole lot of things including the installation costs, that can affect the cost effectiveness when those measures are cost effective, there is no upfront costs. The cost recovery charges on the customer’s bill again are capped at 80% of the estimated savings annually, but windows might be a good example. When you can’t meet that cost effectiveness criteria, there is an optional copayment upfront for the customer to essentially buy down the overall project cost to meet that cost effectiveness criteria for the cost recovery period. Windows are not an especially common application. I think there’s some potential with low emissivity storm windows, but we haven’t seen a lot of that, more typically it’s a lot of energy efficiency measures, HVAC again, the potential really growth in the solar PV and battery storage and EV space is more so driven by actually the benefit streams that those can deliver.

So it’s not just about energy efficiency and energy cost savings anymore. It’s actually also about value streams being created by those upgrades. Not every upgrade is cost effective, and as soon as you start having upfront costs of any kind of course, you start to run into the traditional barriers that prevent folks from accessing these upgrades in the first place. And so trying to keep any upfront copayments very low is important, but not always easy. And I think it highlights something else that’s important about these programs, which is they compliment other programs well, they integrate well with other no cost programs that are out there for folks. They integrate well with rebates. So let’s take for example, even some of the really generous rebates in the inflation reduction act, the home efficiency rebates, home electrification rebates.

If you’re a household that’s below 80% area median income, you can qualify for an $8,000 rebate for a heat pump installation. And even if that’s point of sale, even if you can get it very close to the time of investment, $8,000 is not going to overcome the upfront cost of most heat pump installations. You might still have 4, 5, 6, 8, another $10,000 of investment, and if you’re a household that’s below 80% a MI in your community, the odds of you being able to cover that easily are not very high. But if you can stack that, if you can integrate that really quite generous rebate from the Inflation Reduction Act, if you could integrate that with an inclusive utility investment program which can also further capitalize the energy savings that come with that HVAC upgrade, then actually both programs can extend their reach farther than they could otherwise. So it’s an important point that you’ve asked about in terms of when you’re not able to meet that cost effectiveness criteria, and it also illustrates how inclusive utility investments can help a given amount of state or federal funding to go farther.

John Farrell:

So how do these kinds of programs happen? Is it a state legislature passes a law saying utilities, you’ll offer this? Is it a public regulatory commission, public utilities commission that oversees a utility that will say, you need to include this program as part of your energy efficiency portfolio? Is it some random guy in the energy efficiency office at the utility one day the light bulb goes off and he’s like, I met with Matt Flaherty from Clean Energy Works and he told me this is a great idea, now I’m going to go for it and our business, our utility is going to start offering this program. How do you find that this usually happens and if people are interested in listening as they listen to you talk about this and having it happen, where would they go to encourage that to happen?

Matt Flaherty:

Good questions. So interestingly, the adoption pathways that we’ve observed in the field and that we help support are really diverse and kind of touch on all the things that you just talked about. So I’ll cite a couple of examples. We’ve seen legislative mandates. I mentioned to Illinois earlier. The Climate Equitable Jobs Act included a provision that requires the two major investor-owned utilities to develop programs. In Missouri, it was driven through their commission and the Missouri Energy Efficiency Investment Act filings their MIA filings. So I think the commission essentially directed the IOUs In Missouri, if you want to have a MIA filing, which I believe is voluntary, you need to include a Pay As You Save program as part of your offerings. We have seen stakeholder groups interact with utilities over time. The Duke Energy example I gave is one of those. So there was a tariff on-bill working group of community advocates, groups like the North Carolina Justice Center, the North Carolina Sustainable Energy Association, and others that worked together over time through the rate case process before the commission, worked with Duke Energy, eventually got strong alignment between the utility and the advocacy groups, which is kind of what you’re going for. You want to find the common interests of both and that led Duke to really champion the solution. Now in getting it through the final stages of commission approval, they’ve been making some of the rounds, giving webinars and the like. In fact, by the time this airs, the world have already been a webinar that Smart Electric Power Alliance is hosting with Lon Huber from Duke Energy describing, highlighting these programs. That’s part of an inclusive utility investment task force partnership that we have with CIPA.

And so there’s really a diversity of pathways. It is regulatory policy, so it’s almost always going to go through the State’s Utility Commission. The exceptions to that might be electric cooperatives depending on the nature of the regulation and their state. But generally speaking, yes, this is going to go through a commission, but it can come from the legislature, it can come from a utility itself.

We’re even working with some utilities now are initiating this. I think in that case it’s still important to make sure that communities are involved, that their programs are responsive and accountable to the communities and that we’re furthering energy democracy and distributed benefits and participation in the clean energy economy and not just having utilities alone driving this forward. But yeah, that’s kind of the whole gamut of adoption pathways. I guess to your final part of the question about how someone might get involved, I think if you’re not working with any utility or for a commission, the process would probably be to reach out to your utility and ask them, is this something they would consider? What offerings do they have? On the efficiency side, working with coalitions, again, we work with a number of state-based coalitions. I mentioned the one in North Carolina. There’s a group in Minnesota working on this and many others. And also we work with some place-based coalitions that are more broad. So I know you’re familiar with the REAMP network. I think you’re actually on the board for that, and we met at the annual meeting a few months ago there. The Rural Power Coalition is another helping to drive. This is part of their policy platform, for instance, the Rural Power Coalition. So yeah, the advocacy space is definitely important and a strong pathway to adoption.

John Farrell:

We’re going to take a short break. When we come back, I ask Matt how inclusive utility investment programs got launched, the potential downsides of mandating utilities to do these programs, the sticky question of letting investor utilities earn their usual rate of return on these investments, and the equity implications of this inclusive style program. You’re listening to a Local Energy Rules podcast with Matt Flaherty, director of building decarbonization at Clean Energy Works.

Hey, thanks for listening to Local Energy Rules. If you’ve made it this far, you’re obviously a fan and we could use your help for just two minutes. As you’ve probably noticed, we don’t have any corporate sponsors or ads for any of our podcasts. The reason is that our mission at ILSR is to reinvigorate democracy by decentralizing economic power. Instead, we rely on you, our listeners. Your donations not only underwrite this podcast, but also help us produce all of the research and resources that we make available on our website and all of the technical assistance we provide to grassroots organizations. Every year ILSR’s small staff helps hundreds of communities challenge monopoly power directly and rebuild their local economies. So please take a minute and go to ilsr.org and click on the donate button. And if making a donation isn’t something you can do, please consider helping us in other ways. You can help other folks find this podcast by telling them about it, or by giving it a review on iTunes, Stitcher, or wherever you get your podcasts. The more ratings from listeners like you, the more folks can find this podcast and ILSR’s other podcasts, Community Broadband Bits and Building Local Power. Thanks again for listening. Now, back to the program.

John Farrell:

One of the things I’m curious about is, and this is going to be speaking from my own experience working with some of those advocates in Minnesota that you mentioned, is around this idea of compelling a utility to provide this. So you mentioned Illinois has and the Clean Energy Jobs Act or Clean Equitable Jobs Act provisions to ask the investor owned utilities to do this. In the work that I was doing in Minnesota, and I was very peripheral of this and I’m taking any credit for the advancement that’s made around this, there was an effort to develop a pilot inclusive utility investment program with the gas utility Centerpoint who seemed very willing to go ahead with this as part of the clean energy partnership that they have with the city of Minneapolis. Among a number of sticking points was who would operate the program? Like would the utility itself do it, which had not a great track record of actually doing a lot of efficiency stuff. So there was concern that they would not really use it to its fullest advantage.

But the other one, and I think this is probably something that has come up elsewhere, is that a lot of investor-owned utilities are used to earning a return on capital investments that they make. They build a power plant and there’s a regulated return that they get on that maybe it’s like nine or 10% often per year on the undepreciated value of that thing. So if it’s a hundred million dollars power plant and after five years it’s worth $50 million, well they’re still earning that 900%, 10% return on the equity investment they made, the capital investment they made in that. So I guess broadly, are there risks to compelling utilities to provide this in terms of the program being run well, and then specifically do you find that there is a hitch in this idea of should the utility be able to earn its regular rate of return on this, which is usually not how energy efficiency programs have operated?

Matt Flaherty:

These are great questions. First I would say yes, there are risks inherent to compelling a utility to develop a program via legislation or otherwise. I think there’s no shortage of ways for a utility to undermine and ultimately probably kill a program if they are not bought in. And so that’s a real challenge. It’s something we’ve grappled with and seen in the field. Again, I think the goal is to get the utilities interest and the customer interest aligned to invest in these measures. Some of the resistance to that historically from utilities, especially investor-owned utilities is probably not unfamiliar to you or to listeners. That energy efficiency might mean load erosion for them. That sort of undermines their bottom line. Even when you have true up mechanisms for the supposed lost revenue that they have, it’s still just a barrier. So as we see more beneficial electrification and load growth on the electric side, I think that is overcome to some degree.

But yeah, it’s tricky to align the utility’s interest and the customer’s interest. It really is, and when a utility is compelled to do something, if they don’t have some level of buy-in, it is going to be more challenging. For that reason, I think having a program operator, a third party program operator is a best practice. If you go to the EPA Energy Star website on inclusive utility investment, you’ll see some of those kind of programmatic and policy design best practices and having an independent third party operator to do that implementation work is I would say a good idea when it comes to the rate of return and how that factors into this question. There are trade-offs is what I would say. First of all, you’ve got maybe the cooperative utility side where this program design really evolved, but those are nonprofit utilities. They don’t need to earn a rate of return, they just need to cover their cost of capital. And a lot of the rural electric cooperatives that have implemented programs have accessed federal programs through the rural utility service that might even have 0% or very low interest rates over time that allows them to deliver programs with a very small level of additional charge for to cover administrative costs or the cost of capital.

But when it comes to those investor owned utilities, there’s a trade off you’re balancing. On the one hand, you want utilities, I think it’s important to try to get efficiency and investment in distributed energy resources, which are essential for resilience and the management and cost effectiveness of the future clean energy grid. It’s just really important to have investment in distributed resources. And if you don’t put those on a level playing field with traditional capital investment that a utility may make in a gas peaker plant or even utility scale renewables, long range transmission, utility scale batteries, if you can’t get those things to operate on equal playing field for the utility, they’re not going to want to invest in distributed resources.

If they do, it might be a very small program, they don’t want to scale it. So on the one hand, I think to scale you’d like to have the utilities seeing the investment in distributed solutions at customer locations as core to their business model, one way to do that is to put it on equal footing to other investments and have that full regulated rate of return. The challenge with that is that it undermines cost effectiveness in program economics. People have a sort of fundamental aversion, I think to it as well. The utility should just be making these investments without earning a rate of return. And I would say we don’t expect that of other utility capital investments necessarily. We do accept that they are investor owned and a rate of return is what is needed to attract capital and invest it. Whether those rates of return are too high is another question and that sort of thing.

But I think the aversion to earning a rate of return on distributed solutions is a little bit of a knee jerk, but if you compare what we’re talking about to other sources of financing, when people are paying 10% or 15% or 20% or more interest, the terms are actually still pretty good. But the other key piece of that is recognizing the system benefits. So when you have a lot of energy efficiency and other grid flexibility measures going into homes at scale, you are generating considerable benefits for the rest of the rate payers that are not participating in the program, you’re getting peak load reduction. You might be deferring maintenance or upgrades in the distribution system. If you can recognize that there are benefits to all rate payers, you can make the case that that rate of return shouldn’t necessarily be born fully by the participant in the program, the individual who’s got the site specific investment with the site specific cost recovery, the individual customer, but rather that some of that rate of return should be socialized across all rate payers because there is a significant rate payer benefit to everybody.

And so that’s kind of what’s at play. I would say there’s not a single answer. What’s happening in the field in IOU space is all pretty new and how those dynamics affect the utility’s willingness to invest and actually scale solutions at a pace that’s closer to what we need to see to address the climate crisis. That’s what I think the advocacy groups and the utilities and the commissions and us at Clean Energy Works, that’s what we all have to grapple with. So I think being clear about the risks and kind of going in either direction with respect to the cost of capital and whatever the rate of return that the regulated rate of return is with the utility, it’s just important to be clear out about those things and what making one decision might entail.

John Farrell:

It’s really interesting, and I appreciate the way that you handled this because I certainly am one of those that had the knee-jerk response on the rate of return and the implications it has for the cost effectiveness of investments. But that idea of connecting it to the system-wide benefits is intriguing, but also just thinking about how much investment we need both to face down the climate crisis, but also the enormous amount of benefit on the table. I mean organizations like ACEEE have for years said we could reduce energy use by 30 to 70% if we really maximized investment in energy efficiency and we’ve never been anywhere close. So the idea of really motivating a utility by saying actually you can earn the same rate of return and putting it on a level footing, like you said is kind of intriguing there. Even if I am one of those people that says, I think that rate of return might be too high in general, but I I’m more persuaded by the idea of even footing than I have been before in this conversation. So I appreciate your perspective there.

Matt Flaherty:

And I’m not saying it’s simple and that’s the way we should go either. I recognize the trade-offs and the challenges. I just wanted to articulate those and speak to that balancing act that you have to play.

John Farrell:

So tell me a little bit about what role Clean Energy Works and that you play in inclusive utility investment policies. So it sounded like you’re in touch with folks that work in some different states. You’re probably not the people who initially call a utility saying, hey, I wish you would offer this. Maybe you are, but what role are you playing in the advancement of this policy across the country?

Matt Flaherty:

Yeah, we kind of work with a lot of different folks in different spaces, so we definitely engage in the regulatory space. We attend policy summits that the National Association of Regulatory Utility Commissioners is hosting, try to engage with state energy offices and staff and help support them in their goals. I feel like the end use electrification piece of the climate puzzle or the energy puzzle is one that is only just getting the attention it deserves. It’s a lot easier when you see these kind of omnibus packages from state legislatures to mandate a hundred percent clean energy by X year, but there’s often not any real solution that will scale to have that a hundred percent inclusive end use electrification. And so it’s potentially working with state energy offices or even legislators and legislative committees to support their goals when they start to really become a little more clear-eyed about the scope and scale of the challenge.

We’re talking about over a hundred million homes that need fundamental upgrades in some way and probably a $3 trillion plus problem that you can’t simply fund your way out of. You have to find financial solutions that can scale. And so I think there’s an opportunity where states have strong goals that they’re trying to meet and they’re struggling to meet them. You’re right, we do work with a lot of community-based organizations, place-based groups both through coalitions and networks. I mentioned a few earlier as well as within a given state, we take calls from utilities who want to learn more. Absolutely. We have a strategic partnership with the Smart Electric Power Alliance right now to increase visibility and education around inclusive utility investment policies and the opportunity they present. And we’re, we are learning in that partnership as well. We’ve convened focus groups with utilities to learn what the barriers are from their perspective. And so we kind of work with anyone who’s interested in driving this forward and there’s a lot of different players who can be involved in that. So it really is quite an eclectic mix of stakeholders and groups we convene and work with providing essentially issue education, technical assistance, support. We don’t really do much fee for service work. We’re a philanthropically funded organization that is really just trying to be a catalyst to drive fiscally sustainable and scalable change based on the data we’re seeing in the field.

John Farrell:

That’s great. Its really helpful to sort of understand the role that you play there. I wanted to come back to an issue that you already touched on this when we talked about why would we want to do this. When you talked about that, I thought your specific example about the Inflation Reduction Act has incentives for things like heat pumps, but they’re not going to cover the entire cost of something. And if you have a low income customer who wants to be able to get a heat pump or have access to other clean energy investments that doesn’t have savings, that maybe has a poor credit score, they’re not going to get there. One of your colleagues, Holmes Hummel, said at a meeting I was at recently that utility investment and utility financing is more equitable than bank financing. And so I just would love you to talk a little bit more both on the side, like the consumer perspective, how does this more equitable in terms of giving access to clean energy investments to underserved and marginalized communities? And I’m also curious though too, if you could talk about in the implementation of the program, if there are other opportunities where you can uplift equity maybe in the hiring and training of the people who do the work. Are there maybe the utility in picking the third party provider or program operator? I’m just curious if there are other ways that you’ve seen these programs run in a way that helped address some of these historic disproportionate treatment of communities of color, of low income folks when it comes to having access to clean energy.

Matt Flaherty:

When you’re talking about the banking system and consumer financing and being able to access distributed clean energy upgrades for your home, there are large groups that are just disqualified. And so credit scores are a big piece of that. And so we’ve just got a lot of people that have very low credit or no credit and simply cannot access loans in the banking system. But those same people can have a utility account and they can be paying their energy bill, they can have, these policies are consistent with levelized billing programs, with programs that might have low income assistance for payment. Essentially anyone can get an account with a utility to essential energy services and that we all need to live and if the utility can make that investment for the customer because it is a cost effective investment, we’ve got these kind of robust consumer protections that allow a level of inclusion really and access that far outstrips what the banking system can provide.

There are other important solutions out there. I don’t want to understate the importance of no cost weatherization programs and other upgrade programs, but as I mentioned earlier, those have just been literally just orders of magnitude away from the need. So we need other options that can overcome the systematic exclusion and barriers encountered in the consumer financing and lending world. And I think utility investment solution has really strong potential there and has demonstrated potential there in some of the areas where it’s operated. The Lawrence Berkeley National Laboratory did a study of I think five different Pay As You Save programs about a year ago and concluded that these have been able to reach lower income census tracks than a lot of financing programs have been able to do, and that their potential to reach and serve underserved communities is strong. EPA has recognized the same thing and administrator Michael Regan has highlighted the Pay As You Save system, for instance, as an example of the types of inclusive solutions that we need to more equitably scale the clean energy transmission on the home front.

John Farrell:

Could I just cut in real quick on the banking thing too? I think one thing that also struck me when I was learning about this years ago was where you mentioned people being systematically disqualified around credit scores, that the very notion of a credit score of somebody’s ability to repay something really doesn’t match up well with the kinds of things that we’re investing in here because as you say, we’re mostly investing in things that payback, whereas a credit score used for a car loan or a home loan or whatever are usually for things that don’t pay back. So we have a fundamentally different thing we’re investing in here too.

Matt Flaherty:

Yeah, no, that’s absolutely true. The other thing I want to highlight about credit scores, and it’s not exactly specific to the banking system, it’s more about consumer behavior, but again, another data point from the field, again, Lawrence Berkeley National Laboratory did a longitudinal study of long-term performance of energy efficiency loan portfolios that came out I think last year, 2022, and it tracked in Connecticut, Pennsylvania, Michigan, New York. They’re kind of green loan programs over time. They might have relaxed underwriting criteria or other loan loss reserve funds or other things that allow them to, at least as a technical matter, open the door for loans to folks with less than good credit. But the data, the experience of those programs is that the people who are actually choosing to access loans, regardless of whether or not the question of whether they could technically access them, the people who are choosing to take on those loans, 90 plus percent of folks still have good, very good or exceptional credit and can probably access the financing anyway. And those programs have just not been able to scale. And so none of them have reached more than 1% of the people in their territory over 10 year periods. And this has really been the all in solution of expanding access to these upgrades and the financing. There’s too many barriers. It’s not going to get done. It’s not to say it doesn’t have a role to play, but we absolutely need other solutions that can overcome the barriers that we see in the consumer financing world.

John Farrell:

So I kind of cut you off. You had done a nice job of talking about how pay as you save or inclusive utility investment programs have been reaching low income folks. I was curious about, other than on the consumer side in terms of who you can reach with the programs, are there other pieces of the program operation that also can help to address some of the historical issues around energy burden or access to jobs or other things like that?

Matt Flaherty:

Yeah, yeah, you did mention that and I hadn’t followed up, so thank you for bringing it back to the floor. I think this is part of the local economic development piece. As you start to scale solutions like this, the workforce development piece and really emphasizing equitable workforce development is a prime opportunity. I wouldn’t say it’s an area that inclusive utility investments have necessarily excelled to date, but I think it illustrates the opportunity of having a scalable, fiscally sustainable way to deliver these types of distributed clean energy upgrades. That’s the promise of the clean energy economy. And we see benefits in workforce, especially when we’ve got these major inflections of cash like we did with the American Recovery Reinvestment Act, I believe was the acronym, the Aura period in 2008 to 12 or so. That period of time, the Inflation Reduction Act and bipartisan and infrastructure law are another example of this.

We’ve got this major infusion of cash, but I think where the scalable solutions come in is not just the ability to go way farther than those programs can go and to compliment those programs, but to deliver a steady supply of jobs that can actually benefit communities and be sustainable. And so I think it’s important to have the community groups again involved in the programs, even if utilities all bought in, they need to have these community touchpoints and accountabilities that we can use these types of programs and policies that are so promising to their full effect and full benefit. It absolutely should be a vehicle for overcoming historic barriers in workforce opportunity, for instance. So I think there’s a lot of, that’s one example of an area with a lot of opportunity. Absolutely.

John Farrell:

Do you have an example of a particular program that you’ve seen or been involved in setting up that you think does this thoughtful community engagement really well?

Matt Flaherty:

Yeah, I think Roanoke Cooperative is a good example on a variety of fronts. They’re a cooperative in Eastern North Carolina that has really just illustrated a lot of best practices in program operation and had some innovative solutions to address some of the barriers that still persist. And so they’re really seeking to serve their members in a meaningful and engaged way. And they’ve developed some things that can overcome the housing maintenance deferral issues that I talked about before, working with philanthropic partners to address those repairs before making the efficiency investments. And then similarly where you’ve got solutions that are not fully cost effective and have an upfront copayment the opportunity to buy down that upfront copayment for a certain set of customers, for instance, income qualified customers. And so they’ve done a really great job, I think, of supporting their membership and responding to their membership to bring this program forward.

They’re also, I think, an example of one that had a loan program previously that wasn’t really able to reach folks. And so they developed this Pay As You Save system, which has really helped reach a lot more of their member owners. And so yeah, they are, I think a good example, and I mentioned earlier, the CIPA inclusive Utility Investment Task Force that is underway. That’s ongoing through September or October of 2024. There’s been three or four meetings already. If you just Google those terms, CIPA Inclusive Utility Investment Task Force, you could find it. And I wanted to note that membership is open to non-utility members, non CIPA members, so anybody can join that. And Kathy Davison, the CFO with Roanoke Cooperative is one of the co-chairs of that task force and bringing a lot of great experience and insights into the best ways to design and operate these programs.

John Farrell:

I have a left field question for you, so if you don’t have an answer to it, that’s totally fine. But I was just remembering that in a previous house I lived in, we did a radon test and they found elevated levels. And I was having now faced with this mitigation cost of a couple thousand dollars, and we found out that if our doctor wrote a note that it was a health issue, that we would then be able to send that and use our flex spending account for medical expenses to help pay for it. And I’m just curious if you’ve seen any intersection between the health system and these kind of clean energy investment things where there would be money, because a lot of these things have health benefits, like consistent temperatures in the homes, sometimes like the pre weatherization mitigations that are happening that might have to do with lead paint or asbestos. Have you seen at all, maybe it’s not something you worked directly on, but I’m just curious if you’ve seen some intersection like that.

Matt Flaherty:

Yeah, it’s not something I’ve worked directly on, but I know that Medicare and Medicaid dollars have been discussed in the context of asbestos remediation, for instance, or other health related issues. Another health intersection is folks who have durable medical equipment. These are people who really can’t afford outages and a lot of them anyway, and they could be prioritized for investment, potentially bringing in health-focused resources to allow them to have a level of resilience in the face of increasing power outages and that sort of thing. So yeah, the health dimensions including addressing indoor air quality and that sort of thing, I think are there. It’s been something on our minds, but not something I have worked directly on in terms of braiding or stacking resources from other sources to make up that full investment that’s needed.

John Farrell:

I think somebody once said, I think it’s a group called Health Professionals for Healthy Climate has been talking about this, I think around gas stoves and other gas burning appliances as more evidence has come out of the impacts on health, respiratory illnesses, that kind of thing. So I was intrigued. I was just motivated to ask you all of a sudden about it, thinking about that in the context of that experience that I’d had.

Well, Matt, thank you so much for coming on Local Energy Rules to talk about inclusive utility investment. It is such a remarkable tool, I think both from the standpoint of plowing down major financial barriers that people have to clean energy investment, but also I would hope at really accelerating how fast we can invest in distributed energy resources. And I also just appreciate you talking me off the ledge about utility rate of return. I might not be totally sold on a utilities pitch about that, but I’m at least willing to be a little more thoughtful about it.

Matt Flaherty:

Yeah, of course. It is a pleasure being on. Thank you.

John Farrell:

Thank you so much for listening to this episode of Local Energy Rules, discussing inclusive Utility investment with Matt Flaherty, director of building decarbonization at Clean Energy Works. On the show page, look for links to a short video overview of the concept as well as links to the various studies Matt mentioned during our conversation and other resources about inclusive utility investment. On the website of the Institute for Local Self-Reliance, you can also find our research hotspot on what we then called Inclusive Financing. Local Energy Rules is produced by myself and Maria McCoy with editing provided by audio engineer Drew Birschbach. Tune back into Local Energy Rules every two weeks to hear how we can take on concentrated power to transform the energy system. Until next time, keep your energy local and thanks for listening.