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

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.

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.

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.

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?

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.

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.

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.

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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?

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.

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.

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.

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.

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.

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.