Inclusive Utility Investment: Expanding Access to Energy Improvements

The daunting challenge of combating climate change can begin at home, in the buildings where we live. The residential sector is ripe for improvement, having accounted for 22% of total U.S. energy consumption in 2022. Two ways to reduce our residential building stock’s emissions are to electrify buildings and make them as efficient as possible. Electrification and energy efficiency can also bring meaningful economic benefits to residents – and for lower-income households, these benefits can be especially important. A lower energy burden frees up money for other essentials such as food, rent, and health care.

There are also significant health benefits associated with replacing oil and gas appliances with electric appliances. Chronic health conditions such as heart disease, diabetes, asthma, and chronic obstructive pulmonary disease (COPD) can be exacerbated by indoor air pollution from gas stoves. Gas appliances can leak, potentially leading to dangerous exposure to carbon monoxide, whereas electric appliances don’t carry this risk. And on a related note, upgrading heating and cooling systems can greatly improve consistent comfort.

Despite the many benefits of home electrification and energy efficiency improvements, these upgrades are out of reach to many consumers, due to high upfront project costs. Furthermore, renters and rental property owners are typically disincentivized from implementing major energy efficiency improvements. This is because major energy investments undertaken by owners primarily benefit tenants, whereas similar investments undertaken by tenants primarily benefit owners.

One solution that is attracting attention – a financing policy solution commonly known as inclusive utility investment – provides a promising path forward for bringing affordable energy improvements to households nationwide.

What is Inclusive Utility Investment?

Under an inclusive utility investment program,¹ a utility invests the upfront capital to pay for customer-sited energy upgrades – typically home efficiency and electrification improvements. Utilities can apply any existing incentives, such as rebates, to lower the initial project cost. The utility then typically recovers the upfront project cost through a fixed cost-recovery charge – which is tied to a metered building location, not the customer – and applied to the customer’s monthly bill. (Certain other costs, such as general administrative costs, can be captured via a separate mechanism.) For cost-effective projects, the cost-recovery charge is calculated to be lower than the estimated annual bill savings the customer stands to enjoy as a result of the energy upgrades, resulting in projected net bill savings. Consumer protection provisions help ensure that upgrades are effective; customers won’t incur cost-recovery charges for malfunctioning  upgrades.

Importantly, the inclusive utility investment program model isn’t limited to residential building electrification and energy efficiency. It also may be applied to non-residential customers, and potentially to support solar PV, battery storage, EV charging and EV batteries — potentially for demand response applications, including virtual power plants (VPPs).

More than a dozen utilities have launched inclusive utility investment programs, with more under development. These programs include Roanoke Cooperative’s Upgrade to $ave program, Midwest Energy’s How$mart® program, Ouachita Electric Cooperative’s HELP PAYS® program, and Eversource Energy’s Smart Start program.

SEPA just launched a new initiative – the SEPA Inclusive Utility Investment Task Force – to explore opportunities and challenges related to the model, including program development and implementation. All stakeholders are welcome to join the Task Force, which is led by two industry co-chairs: Cathy Davison, of Roanoke Cooperative, and Nick Bafaloukos, of ComEd. Register here to stay informed of upcoming Task Force activities. The Task Force is part of a broader SEPA partnership with Clean Energy Works to promote awareness and understanding of inclusive utility investments.

Benefits of Inclusive Utility Investments

The primary benefits of inclusive utility investment programs typically include:

Helping reduce initial customer cost barrier: Energy efficiency and electrification upgrades are often too expensive for many residential customers, particularly lower- and moderate-income (LMI) customers. Inclusive utility investment programs do not require customers to pass a credit check or take on personal debt, and they can significantly reduce or eliminate the upfront cost for projects. For all cost-effective projects, participants pay no upfront costs. When an individual project is not cost-effective (e.g., due to low bill savings potential), the customer has the option for a copayment to cover a portion of the overall project cost, such that estimated utility bill savings will still exceed the ongoing cost-recovery charge.

Broadening access to energy efficiency and electrification programs: Some utilities prioritize including income-qualified households in inclusive utility investment programs. This allows utilities to pair inclusive utility investment programs with existing incentives available to income-qualified households. (These programs may also be paired with incentives for other residential customers.)

Benefiting both renters and property owners: Under the inclusive utility investment model, energy upgrades are tied to the metered location (because they are based on the building’s energy saving potential), and cost-recovery is tied to the property – not the customer. Property owners benefit from energy improvements to their property, and renters can benefit from lower bills, improved comfort and potential environmental health improvements.

Helping utilities meet energy savings goals: Some utilities must achieve a high volume of retrofits to fulfill their residential energy savings targets. In those instances, customers may be more likely to participate in an inclusive utility investment program, compared with programs that require customers to take on debt. By opening the door to more customers, inclusive utility investments are a potentially scalable solution for utilities.

Challenges and Barriers

There are also common barriers to program development and implementation, which may include:

• Helping state regulatory commissions and staff fully understand how inclusive utility investment programs work
• Obtaining board or regulatory approval for a new program — and especially for an authorized rate of return because other energy efficiency and demand response programs may be treated as operational spending (as opposed to a capital investment with an authorized return)
• Ensuring equity in program design by stacking incentives for income-constrained households
• Addressing potential housing-quality issues, such as health, safety or structural deficiencies that may prevent a project from moving forward
• Ensuring the quality and accuracy of estimated energy savings from an upgrade package, as well as administering post-upgrade evaluation, measurement and verification
• Designing programs which meet cost-effectiveness definitions commonly used by regulatory commissions

Consumer Protection

Importantly, inclusive utility investment programs should be designed to ensure that customers receiving energy improvements are protected during and after the upgrade process. The U.S. Environmental Protection Agency has published a robust list of essential consumer protections, based on current best practices embraced by active inclusive utility investment programs.

As utilities pursue rapid decarbonization while developing innovative solutions for their customers, inclusive utility investment is an important tool to consider. To learn more about benefits and barriers, or to contribute to ongoing discussions or activities, we encourage you to participate in the SEPA Inclusive Utility Investment Task Force.
Note: the next monthly meeting of the Task Force will be October 5 at 4 p.m. ET. All Task Force meetings are public and virtual.

¹ Inclusive utility investment programs are sometimes referred to as tariffed on-bill (TOB) programs. The Pay As You Save® (PAYS®) system is a prominent and leading example of an inclusive utility investment program.