Scaling DER Deployment via Inclusive Utility Investment: Lessons, Opportunities, and Guidance

In 2023 and 2024, scores of utilities and other industry stakeholders rolled up their sleeves to explore the inclusive utility investment model through an initiative launched by the Smart Electric Power Alliance (SEPA) and Clean Energy Works. Inclusive utility investment – as defined by the U.S. Environmental Protection Agency (EPA) – is “a financial solution for distributed clean energy upgrades (including energy efficiency) via a tariff for site-specific utility investment and cost-recovery, approved by the utility’s regulatory authority and designed to ensure net annual cost savings for participants.” In simpler terms, this tool helps customers access on-site clean energy resources because they are financed by their local utility via an approved tariff.

Such programs benefit utilities and utility customers by generating energy savings, supporting carbon emissions reductions, and overcoming barriers to accessing clean energy improvements many customers face. SEPA’s Inclusive Utility Investment Task Force provided a monthly forum for utilities, industry partners, regulators, non-profit organizations, state officials, national labs, and federal agencies to learn about and discuss opportunities and challenges related to these programs.

A new SEPA publication, Inclusive Utility Investment Guide for Distributed Energy Resources, synthesizes many of the Task Force’s findings while providing high-level guidance on program development. More specifically, the Guide helps those interested in inclusive utility investment programs assess feasibility (e.g., project economics, utility value, cost-recovery, capital sourcing); design considerations (e.g., program goals, stakeholder engagement, eligible measures, marketing, and outreach); consumer protections; regulatory approvals; and evaluation. Case studies of programs developed by four utilities – Roanoke Cooperative, Duke Energy, Ouachita Electric Cooperative, and City of LaGrange Utilities – are also included.

Inclusive utility investment can drive VPP-friendly DERs

Among other topics, the Guide explores how inclusive utility investment programs can help utilities support virtual power plants (VPPs) by driving distributed energy resource (DER) deployment. (While definitions of the term “DERs” vary, the Guide takes a broad view that includes not only distributed energy generation and storage but also EV chargers, grid-interactive buildings and electric appliances, energy efficiency, and demand response.) Specifically, the Guide states:

An inclusive utility investment program that supports VPP-friendly DER deployment can check numerous boxes for utilities, customers, and regulators alike. This opportunity is especially timely, considering that interest in – and support for – VPPs among state policymakers, regulators, and utilities has been flourishing, as detailed in a new report by SEPA and the N.C. Clean Energy Technology Center. For these reasons, and with an eye toward the future, I recently interviewed Matt Flaherty, Director of Building Decarbonization at Clean Energy Works, to learn more about this opportunity. (Matt is a co-author of the Guide and served in a leadership role in SEPA’s Task Force.)

SEPA: Would you explain how an inclusive utility investment program can support a VPP? How would that actually work?

Matt Flaherty, Clean Energy Works: Sure thing. As readers likely know, VPPs consist of aggregated DERs that can balance electricity demand and supply and provide other utility and grid services. Increasingly, VPPs are widely accepted as a key model for balancing a grid with a high penetration of renewable energy, rapidly meeting growing peak demand needs, and supporting the cost-effective decarbonization of our power system and end uses. Scaling VPPs necessarily involves scaling the end-use technologies—the distributed solar panels, batteries, smart water heaters, HVAC systems paired with smart thermostats, and more—that make up the VPP.

At least in the residential context, most home upgrades of this type involve a household paying cash out of pocket or self-financing with some type of consumer loan (even if a customer can subsequently access an incentive for enrollment in a VPP), which unfortunately tends to stratify access to these technologies along income, credit, homeowner status, and other sociodemographic lines. This is where the inclusive utility investment model can shine because it is a utility-driven financial solution to deploy DERs that can overcome some of these barriers to access. The key dimension is the value proposition of the resources being deployed. By leveraging that value, the utility can capitalize the upgrades on inclusive terms through a tariff for site-specific investment.

SEPA: What types of customers could be eligible?

Matt Flaherty: As a financial mechanism for site-specific upgrades, inclusive utility investment can be applied to any technology or customer class. A key attribute of the model is that it’s designed to produce net cost benefits annually for participating customers. The value can come from operational efficiency, energy production or storage, grid flexibility, or other benefit streams that are folded into the customer value proposition. When this value can cover the cost of a given upgrade over time, the utility simply makes the upfront capital investment and recovers its costs on a site-specific basis within the useful life of the upgrade. Once the utility’s costs are recovered, all benefits flow to the customer.

By way of a non-residential, non-buildings sector example, we’ve worked with regulators and utilities to explore this as a financial solution for transit and school bus fleet decarbonization, where the utility capitalizes the on-board battery and bidirectional charging infrastructure. The utility leverages both operations and maintenance savings and the value of a grid-interactive storage asset for its cost recovery, while the overall design supports annual net cost benefits for the agency or school.

So while the basic model can be applied to any customer class or technology, the key to scaling investment is really the cost-effectiveness of the technology or measure – that is, its ability to “pay for itself” over time.

SEPA: Which types of VPP-friendly DERs are the best candidates for inclusive utility investment? Which are not currently good candidates?

Matt Flaherty: Context matters, so the answer will depend on the state regulatory and policy landscape, as well as factors like grid congestion, demand profiles, and more. These dimensions all affect the potential value of various DER aggregations in action. The greater the value a given DER aggregation can provide when utilized in a VPP (relative to the cost of the DERs), the more suited that particular technology is to an inclusive utility investment offer. This is because overcoming upfront costs to the greatest extent possible is a primary driver of inclusive utility investment program participation. (When applying the net-savings requirement, if upfront project costs remain, customers would need to make a copayment in order to access the upgrade.)

A good example arose in one of the final SEPA Inclusive Utility Investment Task Force meetings last year, where ComEd shared its plans to deploy paired solar and storage under the Illinois Equitable Energy Upgrade Program (a legislatively directed program that is currently in development within the Illinois Commerce Commission). The relatively favorable conditions afforded by federal investment tax credits (including various adders) plus solar renewable energy certificate (SREC) compensation in Illinois mean that ComEd will likely be able to offer solar (with or without storage) to many customers with no upfront cost, net benefits from day one, and even greater customer benefits once the utility recovers its costs. I should be clear that the focus of ComEd’s proposal wasn’t a VPP application, but the example nevertheless illustrates how utilities can deploy key VPP-supportive technologies today.

Lower-cost technologies like smart thermostats are an easy case, and we’ve seen utilities like Roanoke Cooperative (highlighted in the U.S. Department of Energy’s recently updated VPP Liftoff Report) offer devices for free—co-delivered with HVAC and efficiency investments via an inclusive utility investment program—while enrolling customers in a demand response program with a small, ongoing monthly bill credit. By aggregating these devices, the utility has reduced its peak demand costs. Similarly, companies like Renew Home and NRG are demonstrating how the grid value (alone) of smart thermostats aggregated in a VPP can fully capitalize the cost of the equipment and installation.

Grid-interactive electric water heaters are another good candidate technology. Because electric water heaters provide thermal energy storage, they can help shape demand and provide other grid services. When aggregated in a VPP, these DERs can create value streams that can be stacked with the operational savings of an efficient appliance to provide a greater value proposition to the customer via inclusive utility investment. Depending on the context, these combined value streams could allow a utility to capitalize and deploy the resource with little or no upfront customer costs, which again helps scale the VPP through increased DER deployment.

SEPA: A lot of excitement is swirling around VPPs. Who should be taking the lead on exploring VPP programs supported by inclusive utility investments? States? Utilities? Others?

Matt Flaherty: Many stakeholders in the power sector have an important role to play, and utilities are certainly among them. Utilities are uniquely positioned to drive DER deployment at scale through inclusive utility investments, which can support VPP efforts. A utility’s active involvement in siting and flexing these resources offers great opportunities for systemic cost reductions, avoided or deferred investments (e.g., in peaker plants, utility-scale storage assets, or distribution infrastructure), and load shaping to balance renewable power supply.

States – via regulatory commissions, legislatures, state energy offices, and more – can also help direct exploration or uptake of both VPPs and inclusive utility investments, and we’ve seen examples of each across the country. Finally, I’ll note that utility program operators, VPP service providers, equipment manufacturers, and installers all have an active role to play in delivering this model.

SEPA: Is there a correct order of events in terms of launching an inclusive utility investment program and a VPP? Should one come before the other? Or, if possible, should they be launched simultaneously?

Matt Flaherty: There’s not just one way to initiate an inclusive utility investment program or utilize it to facilitate VPP deployment. But I think seeking to integrate these two concepts from the outset offers some real advantages to both. First, inclusive utility investments will be more successful and see greater uptake if grid value can be incorporated into the customer value proposition (traditionally, operational savings have been the main value stream benefitting participants). And second, VPP programs will be able to scale more rapidly through increased customer enrollments if they can overcome the cost and credit barriers that currently limit uptake of DERs.

What policy and/or market barriers need to change in order to facilitate the creation of VPP programs supported by inclusive utility investments?

Matt Flaherty: To a degree, the market and policy landscape is already suited to this approach, and the growing attention on VPPs from market actors and policymakers is helping to illustrate the opportunity. Utilities need regulatory approval to implement inclusive utility investments, and there are a dozen states with relevant policy precedents. However, capturing different types of grid value in a VPP and channeling it into an inclusive utility investment in a given set of DERs is new. One of the challenges with that is assessing how much future value a given asset will produce and, thus, how much of that value can help offset project costs. And of course regulators need to be confident that the compensation scheme is just, reasonable, and fair. Fortunately, researchers, policymakers, utilities, and VPP service providers are working on questions like these to help scale VPPs.

SEPA: If a utility is interested in exploring the inclusive utility investment model to support a VPP, what’s the next step?

Matt Flaherty: I think the new Inclusive Utility Investment Guide for Distributed Energy Resources is a great starting point to learn more. Also, the EPA’s Inclusive Utility Investment website includes resources, current programs, and primary documentation like approved orders and tariffs. With VPPs, there’s no shortage of opportunities to learn more and engage, including the U.S. Department of Energy’s VPP Liftoff report (updated in 2025), multiple SEPA webinars and SEPA reports, the VPP Partnership (VP3), and more.

As utilities move into a diligence stage, speaking with utilities and program operators who have experience with inclusive utility investments is invaluable. Also, working with relevant stakeholders can help shape program design and strengthen community relationships, which is especially beneficial since the model is well suited to benefit underserved customer segments. And finally, I’ll stress again that a utility needs to analyze the potential value of various measures to identify what makes the most sense economically, keeping in mind that the biggest driver of program success (and thus, resource deployment) is whether the project economics can overcome upfront costs for the customer.