Where Should Dollars Come From for Fuel Switching?

Where Should Dollars Come From for Fuel Switching?

Date: 2 Aug 2018 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

For years, the only way to reduce energy system pollution other than conservation has been renewable electricity generation from wind or solar power. Their rapidly falling costs have fundamentally changed the discussion in the electricity business from “how much can we cost-effectively build?” to “how will we accommodate 100% renewable energy on the grid?”

The triumph of renewable electricity has implications for other sectors traditionally controlled by the fossil fuel industry, and for regulators of those industries. New, commercially available options allow transportation and buildings to tap into this renewable energy revolution. Public overseers of gas and electric utilities now face the question of whether it’s appropriate to redirect scarce conservation dollars to “fuel switching,” providing financial incentives to switch energy customers to rapidly-becoming-renewable electricity.

The Rise of Electric Options

In transportation, electric vehicles have quickly outstripped hybrids as the go-to and affordable technology to reduce driving costs and pollution. Despite higher upfront costs, today’s electric cars have the range to cover most Americans’ daily driving at one-third the fuel cost of gasoline, providing substantial lifetime savings.

Electric vehicles are offering such a compelling financial proposition to drivers that it now threatens oil and gas producers, who recently spent big to kill a Texas wind farm.

Read more about the opportunity of electric vehicles in ILSR’s 2017 report––Choosing the Electric Avenue: Unlocking Savings, Emissions Reductions, and Community Benefits of Electric Vehicles

Electrification’s next victim is fossil-fueled building heating. In rural areas, ground-source or air-source electric heat pumps can drop in today with significant savings for customers whose furnaces or water heaters use delivered fuel like propane or fuel oil. In urban areas, customers connected to cheap gas infrastructure have had much lower energy costs to heat their homes and water, thwarting cleaner alternatives. Newer versions of air-source heat pumps offer more efficient cold-weather operation, the cleaner grid electricity may finally be coming for the gas-powered appliances in homes and businesses.

The Big Question

The opportunity for big savings and big cuts in pollution poses a big question to energy system regulators: should utilities be able to use conservation dollars to encourage customers to “fuel switch”; in general, to switch from fossil fuel to electricity.

The Minnesota Public Utilities Commission recently took public comments on the proposal to redirect money typically dedicated to rebates for energy efficient appliances or home weatherization to encourage fuel switching. The Center for Energy and Environment lays out four criteria that it suggests must ALL apply when using conservation dollars for fuel switching:

A Bigger Question: Why Not Use Their Own Money?

ILSR agrees with all four principles, but asks a related question: if an electric utility stands to gain more sales by encouraging customers to switch fuels, then why does it need to spend conservation dollars to do it?

An electric vehicle will use, on average, about 4,000 kilowatt-hours a year, providing an additional $440 in annual revenue to the electric company that provides the power (based on the national average of residential retail electricity prices). Likely to be in use for at least 10 years, each electric vehicle is worth over $4,000 in total additional electric sales revenue. Electric utilities could use a portion of that new revenue to offer rebates on vehicles or charging infrastructure, or to subsidize financing to lower upfront costs.

For example, the Chevy Volt and Honda Fit are similarly sized hatchbacks, but the former retails for $36,000 and the latter for just $16,000. The federal tax credit closes the gap to $12,500, so what if an electric utility loaned a customer the difference at no interest? The total subsidy (assuming a 4% interest rate for the loan over 72 months) would be $1,800, less than half the total anticipated revenue from electricity sales.

Similarly, a residential air-source heat pump will boost electric provider revenue by $341 annually, if the customer uses an Energy Star model, providing over $3,000 in total additional revenue over 10 years, well over the average $1,200 premium for an air source heat pump compared to a natural gas furnace.

A Fifth Fuel Switching Policy Principle

The four key criteria provided earlier could be written another way. Use of conservation funds for fuel switching incentives must:

  1. Reduce energy consumption
  2. Reduce energy costs for the customer
  3. Reduce pollution
  4. Reduce or hold steady demand that coincides with system peak

These are good minimum standards for using conservation funds, but given that electric utilities already have a financial incentive to switch customers, I’d add a fifth: incentives must target investments with a useful life greater than 10 years or be more cost-effective than traditional conservation investments. In other words, if we’re going to use scarce conservation dollars on fuel switching let’s focus on the big things (furnaces, water heaters, boilers). In a post last year, I shared this graphic from the Deep Decarbonization Pathways Project that shows how few chances we have to intervene to decarbonize some major energy uses, such as boilers or vehicles.

Fuel switching is a terrific concept as the electricity sector goes renewable, but conservation dollars play an important role in shrinking the denominator, reducing the fraction of total energy that must be converted to clean sources. There’s no reason utilities can’t pony up their own money for growing their business, and if utility regulators will allow use of conservation money for fuel switching, it should be reserved for investments with a big, long-term reward.

This article originally posted at ilsr.org. For timely updates, follow John Farrell or Marie Donahue on Twitter, our energy work on Facebook, or sign up to get the Energy Democracy weekly update.

John Farrell
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John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power.