By Eric Gimon, Sonia Aggarwal, Michael O’Boyle, and the experts of America’s Power Plan
New energy technologies that give customers more control over their energy production and use have come down in cost quickly and substantially, causing customers to question their relationship with the hometown utility. Many utilities have understandably reacted with alarm to the rise of new low-cost resources that might reduce the revenues they earn through energy sales, disrupting their business model and challenging their natural monopoly status. Utilities are facing a need to evolve to accommodate these trends while simultaneously responding to new environmental standards.
The good news is that utilities have an opportunity to benefit from increased deployment of energy efficiency and distributed generation. Utility-run efficiency program budgets reached $6.3 billion in 2013, but third party financiers have largely dominated the distributed generation market to date. By leveraging their social mandate and aggregator status, utilities can become essential enablers for customers to take advantage of new investment opportunities in distributed generation and efficiency. By enabling or providing these services to their customers, they can fold the environmental and economic benefits of customer investments into their environmental compliance plans, making it cheaper and easier to meet EPA’s Clean Power Plan (CPP).
Overcoming Barriers to Utility Investment
Customer-sited generation and efficiency cost money up-front, and then reap savings over the relatively long life of the assets. This front-loaded cost structure makes it difficult for many customers to take the plunge on major efficiency projects or installing distributed generation. But this same cost structure makes these resources perfect candidates for financing.
In decoupled or restructured regions, utility financing of efficiency has achieved important successes and continues to grow, but utility financing of customer-sited generation has not yet taken off in the same way. In some cases, utilities are disallowed from owning and operating customer-sited generation and in other cases they simply do not see it as good business under their current regulatory structure. Of course, market power issues must be carefully considered in each jurisdiction, but utility financing of low-carbon customer-sited generation—alongside utility financing of efficiency projects—may provide substantial value to many utilities that are looking for low-cost options to meet new EPA standards.
Beyond Clean Air Act compliance, financing offers utilities an opportunity to meet customer demand for clean energy resources—making them available to more customer classes. For example, third-party financiers often require a credit score above 680 and disallow anyone who has filed for bankruptcy in the previous five years. This means there are plenty of customers out there who would be interested in installing distributed generation or undertaking efficiency improvements, but who are not currently served by third-party financiers.
In response to this market failure, several innovative financing models and new programs can make it easier for forward-looking utilities (especially those that buy, rather than generate, wholesale electricity) to take advantage of both efficiency and customer-sited low-carbon generation, while lowering bills for their customers and reducing their carbon intensity.
By enabling customers to finance efficiency improvements or distributed generation via a small payment on their monthly utility bill, on-bill financing can open up new options for utilities. Leveraging the utility’s access to large amounts of low cost capital and the authorization to collect repayment via tariffs, utilities can stimulate investment in electric, gas, and water efficiency as well as distributed generation and other types of customer-sited resources.
By establishing a voluntary tariff for customers that want to access the utility’s low cost of capital, a utility can offer terms of financing that enable building owners or tenants to purchase and install money-saving products with no upfront payment – and no debt obligation. Pay As You Save® (PAYS®), a system developed by the Energy Efficiency Institute of Vermont, is one variant of on-bill financing that uses this approach, and it has already been adopted by twelve utilities in five states. Under PAYS, the utility recovers its costs for a customer-sited efficiency or generation investment by adding a site-specific charge to the customer’s bill that is less than the savings, resulting in lower bills for the customer right from the start. If utilities or policymakers want to provide incentives for any specific kinds of products, customers can reduce the total amount financed by taking advantage of concurrent rebate programs.
Those who reap the savings from efficiency or distributed generation pay for the products over time via their utility bill, but only for as long as they occupy the building. When a customer moves, the repayment structure is transferred to the next customer at that site who continues to enjoy the savings. This kind of repayment structure reduces risk for utilities as financiers. It leverages the existing billing relationship between customers and utilities, and the right to disconnect as a remedy for delinquent accounts increases repayment rates.
The PAYS® system has three essential elements: on-bill financing, locational contracts tied to the meter rather than the individual customer, and independent certification of the energy upgrades by contractors for quality assurance. As a result, the PAYS system has stimulated more than $20 million in voluntary customer investments in efficiency. Evaluations of these kinds of programs have shown that it raises customer participation in energy efficiency programs, promotes more substantial retrofits, and naturally encourages third party participation.
A recent announcement highlights new potential for on-bill financing:
Billions in New Federal Financing Available for Distributed Energy with a Utility Business Model that Makes Sense
The new Energy Efficiency & Conservation Loan Program (EECLP) through the Electric Program of the Rural Utilities Service makes unsubsidized Treasury rate loans available for a wide range of investments on the customer’s side of the meter. For the first time, non-profit utilities serving rural areas can draw on the same pool of $5 billion they have always used for supply-side investments to invest in everything from energy efficiency to distributed clean energy and smart grid solutions. This opportunity for utilities comes at a convenient time as they think through new ways to drive down carbon emissions without driving up bills for their customers.
One electric co-op in North Carolina recently received the first loans from the new program. Roanoke Electric Membership Cooperative in North Carolina will use its $6 million loan to implement the PAYS system, launching a voluntary program called “Upgrade to $ave.” Based on experience with previous such programs in Kansas and eastern Kentucky, the average investment in cost effective energy efficiency per home under this program is about $7,000 with an average annual savings of 25 percent. Because PAYS circumvents the traditional barriers to energy efficiency investments, Roanoke Electric’s innovative combination of federal financing with PAYS represents a meaningful way for low-income and rural customers to access untapped savings from distributed clean energy.
Not only does this new program allow customers of all kinds to access the benefits of distributed clean energy, Roanoke has made it clear that this type of investment makes sense for its business plan. As a retail distribution utility, Roanoke Electric purchases power from the North Carolina Electric Membership Cooperative, which procures power from PJM’s wholesale power market (at location- and time-varying prices) and then sells energy to its members at fixed rates. Because Roanoke Electric passes through the costs of wholesale electric power, the utility does not suffer from lower energy sales. Furthermore, because similar whole-home energy retrofit programs have demonstrated peak power reduction concurrent with the system peak, the utility can gain millions of dollars from reduced charges for power during peak demand periods. This benefit, which is shared by all members of the utility—not just those who generate the benefits—helps ensure Roanoke Electric can recover the costs of maintaining its distribution network. Hence, on-bill financing is a winning proposition for the utility and all its members.
Roanoke Electric’s announcement is particularly exciting because it shows that distributed clean energy can be made available to ordinary families, while enabling utilities to thrive. The utilities can deliver value to individual customers who opt in, and simultaneously deliver financial benefits to all their customers—regardless of their direct participation.
Thank you to Holmes Hummel, Richard Caperton, and Howard Geller for their input on this piece. The authors are responsible for its final content.