Tariffed on-bill programs can deliver immediate financial benefits to customers by supporting cost-effective energy improvements and by structuring the cost recovery to reflect the life of upgrades. In the following graphic, for example, the customer’s energy bill initially falls by 5 percent — the net effect of the energy savings exceeding the cost recovery charge. After the utility recovers its costs, however, the customer enjoys the full energy savings, which can rise to 25 percent or higher.
Choosing cost-effective measures is a balance of customer interest and utility knowledge. Midwest Energy, a cooperative serving Kansas member-owners, helps finance the full cost of projects that yield significant savings, but only part of the cost of projects (such as new windows) that have a lesser impact on energy use. The following chart illustrates in generic terms how a program might be structured for a variety of measures. A tariffed on-bill program can finance any on-site upgrades estimated to generate sufficient energy savings to cover the cost recovery charge and produce net savings.
Setting the period of cost recovery is also important, both to ensure that the upgrades will continue to perform for a period that is longer than the cost recovery charges apply, and also to reduce monthly payments. Program operators for tariffed on-bill programs can calculate cost recovery plans that allow customers to generate savings even as the utility recovers its costs for the energy upgrades. As a general rule under the Pay As You Save (PAYS) system, programs are designed to recover costs for measures within 80 percent of their useful life, and to use no more than 80 percent of the estimated average bill savings for cost recovery.
The following chart illustrates cost recovery terms for three common items: solar PV, insulation, and a new furnace. The data is based on a cost of capital of 3 percent for tariffed investments, with cost recovery extending to 80 percent of the useful life of the upgrades, and the estimated average monthly savings exceeding average monthly cost recovery charges.
Tariffed on-bill programs that don’t provide financing terms that deliver immediate savings expose future residents to the risk of paying more than they save. Assuring that a portion of the estimated average savings stay with the customer from the start has been essential to win support for a tariffed on-bill programs.
By using a utility tariff rather than a loan as the financing mechanism, tariffed on-bill programs can avoid the hazards of other energy savings programs that restrict access to those with prime credit scores or who own their buildings. Credit-based programs, often paired with utility rebates, lock out less-affluent customers, leaving them to effectively subsidize wealthier customers’ use of the incentives. This is particularly true for renters, who are chronically underrepresented in the population of participants in utility energy efficiency programs for which funds are drawn from all customers.
A tariff-based program, on the other hand, uses a time-tested method of applying charges to a customer’s utility bill to recover costs for system improvements. Utilities have many tariffs for different classes of customers, and they have tariff riders such as charges for fuel costs, environmental compliance, or transmission lines. An opt-in tariff for energy efficiency upgrades differs by being voluntary for customers with cost effective investment opportunities at their location.
Although a tariff is more straightforward, an on-bill loan program in South Carolina (and soon in Holland, MI) called Help My House captures some of the key elements of a tariff-based program. The estimated savings need to exceed costs, and the loans may be transferable to the new owner if the state adopts a law that makes it legal to do so. Laws in both states direct loan programs to be structured in this way.
There are several advantages to a tariff-based program. First, the utility ties cost recovery for its investment to its meter at that location and not the person. This allows customers to make investments that may outlive their residency at the property, with the confidence that they won’t be stuck with the tab if they move.
Additionally, the energy savings from high-efficiency furnaces or production from rooftop solar provide more energy resources that help meet the system requirements for the utility — relaxing the pressure to build more supply infrastructure like power plants and pipelines that they also finance using tariffs. A tariff is a tool for financing distributed energy solutions, and applying that tool to let customers develop on-site energy resources makes sense if those energy resources provide the system with valuable benefits (for more on the “value of solar,” for example, see ILSR’s 2014 report).
The energy savings from high-efficiency furnaces or production from rooftop solar provide more energy resources that help meet the system requirements for the utility — relaxing the pressure to build more supply infrastructure such as power plants and pipelines financed using tariffs.
The tariff-based model lets customers participate who would otherwise be unlikely to have access to financing for energy improvements, including those with subprime credit or low incomes.
Tariffed on-bill programs can also improve energy savings options for renters by allowing tenants (who pay their utilities directly) to access financing, or by helping rental property owners that do pay for energy service the same access to tariffed on-bill investments. That’s especially important in urban areas with a high proportion of rental properties — nearly 40 percent on average — and for renters who typically have little incentive to invest in energy savings measures in a property they do not own.
In Minneapolis, for example, owner-occupied homes comprised just 48.6 percent of the housing stock between 2010 and 2014, according to the most recent Census data available. That means most housing units are rentals, virtually untouchable under less progressive on-bill repayment policy. Plus, the city is adding rental units to the mix — it permitted 141 in July 2016 alone, continuing steady expansion.
Tariffed on-bill programs provide a simpler path to energy efficiency and renewables, like rooftop solar, rather than forcing customers to navigate the complicated process of finding financing on their own. Better tariffed on-bill programs incorporate efficiency and renewable energy assessments and contractor recommendations to help customers discover and vet their options.
Tariffed on-bill programs are useful for customers considering a wide range of cost-effective improvements in both the residential and commercial market segments, including municipal buildings like schools and city facilities. Research by Clean Energy Works shows customers offered tariffed on-bill investment programs instead of a consumer loan tend to invest twice as much in energy improvements. The reason for this increased willingness to accept larger projects with deeper savings is that program participants face fewer risks. They receive immediate net savings and have no obligation to pay for the upgrades if they move away. Also, if the upgrades fail to function, the charges are suspended until the utility or its program operator arranges a repair or remedy.
These conditions allow a customer to manage their risk and assures them access to support if the equipment installed does not function. As a result, at every utility offering a tariffed on-bill program, more than half of all customers receiving an offer to install energy saving improvements accept them, and when they accept, the size of the average project tends to be twice as large as reported for on-bill loan programs.
High Cost Recovery Rate
A synthesis of various on-bill programs in place throughout the U.S. showed a default rate below 1 percent — far below the prevailing national consumer loan default rate (3.28 percent from 1991-2016). In other words, utilities or their capital providers face minimal risk of non-payment when seeking to recover costs for cost effective energy upgrades.
Typical consumer loan underwriting standards tend to refer to indicators that would overestimate the likelihood that a customer will not make payments due for energy-saving investments. Unlike car loans, for example, tariffed on-bill investments in energy efficiency or solar make money for the customer. A credit score estimates the likelihood of paying back borrowed money in general, not the likelihood of continuing to pay a utility bill after it shrinks. Therefore, on-bill loan programs tend to disqualify prospective participants based on an assessment of creditworthiness that is not consistent with the observed non-payment rate of less than 1 percent.
Unlike car loans, for example, tariffed on-bill investments in energy efficiency or solar make money for the customer.
Midwest Energy in Kansas, which has one of the most established tariffed on-bill programs, has vetted gas and electric efficiency upgrades for 2,500 properties. More than half of those customers opted into the program, pushing the total value of improvements past $8 million. Despite the expansiveness of the program, the utility’s cost recovery rate is above 99.9 percent.
A Time-Tested Tool
Tariff-based on-bill repayment allows utilities to tap into a familiar method to expand investment in upgrades that curb energy use and customer costs. The tariff structure represents an agreement with customers to recover costs initially paid by a utility. Historically, energy providers have used tariffs to pay for new power plants, power lines, or pipelines.
In tariffed on-bill programs targeting customer-sited energy efficiency and renewables, a tariff functions similarly by providing the utility with benefits such as energy efficiency as an energy source in exchange for the upfront capital. It differs in that cost recovery is achieved through charges only to the upgraded site rather than a specific class of customers. Because energy efficiency tends to be the lowest-cost energy resource, and because on-site energy generation has such high value, benefits achieved by a utility’s investment these type of cost effective energy upgrades to homes or businesses, public facilities, or institutions can also deliver benefits to all the utility’s customers, such as lower wholesale operating costs and relaxed pressure to build more infrastructure to meet peak demand.
Historically, energy providers have used tariffs to pay for new power plants, power lines, or pipelines.
In tariffed on-bill programs targeting customer-sited energy efficiency and renewables, a tariff functions similarly by providing the utility with benefits such as energy efficiency as an energy source in exchange for the upfront capital.
Put simply, tariffed on-bill programs allow utilities to make investments in energy efficiency and renewable energy upgrades at specific sites, resulting in system-wide benefits. Utilities recover the cost of those investments from the customers at the sites where the upgrades are installed. The utility cashes in on lower costs to meet customer demand, while the customer reduces their energy costs.
Inclusive Financing in Practice
Roanoke Electric Cooperative
North Carolina-based Roanoke Electric has a high-performing tariffed on-bill program, which is operated by a non-profit associated with the utility. To date, the program has tackled upgrades in 120 of its members’ homes and the utility reports an average cost of $6,900.
The estimated average monthly net savings for participating customers in that initial group is $58 as they pay the monthly repayment charge, with estimated average monthly gross savings of about $120. That translates to $1,440 per year in total savings and an annual net financial impact of almost $700, a substantial gain especially for those in lower income brackets.
Program benefits extend to the utility itself. Roanoke Electric reports paying a lower demand charge for the supply of power it purchases, thanks to greater efficiency among its customers. By all metrics, the utility says the program has beat its expectations — especially notable after its initial loan-based program got off to a disappointing start when very few customers were able or willing to take on debt.
Ouachita Electric Cooperative
After implementing a tariff-based on-bill program, Ouachita Electric saw a surge of interest from its customer base in south Arkansas. In the first three months, the number of customers seeking efficiency assessments — a precursor to improvements — doubled from 73 to more than 162.
As of August, 100 percent of multifamily and rental units that received an offer of investment through the program have opted in. Meanwhile, 92 percent of single-family customers that received offers to invest in upgrades at their residence signed on. The program provides a much-needed pathway to energy efficiency and savings in a persistent poverty area. Without it, many customers, unable to cover the upgrade costs themselves, pay $300 or more per month in some months to keep their lights on.
Using smart meters, Ouachita carefully tracks cost savings. It has determined that the program lowers its demand charges and will, in the long run, curtail the need to add expensive new generation capacity.
Inclusive financing offers proven benefits for both utilities and the communities they serve. Tariff-based on-bill programs in particular can bridge troubling gaps in today’s energy marketplace, bolstering energy efficiency and renewables for all customers.
Most utility programs fail to reach a majority of a utility’s customers: residential and commercial renters, those unable or unwilling to assume debt, those unable to assume the risk that upgrades may fail during cost recovery, and those unable to make payments upfront. This creates an especially untenable situation for low-income households facing the heftiest utility bills. Well-designed finance programs, accessible across the board, can address barriers that dampen participation, yielding a meaningful economic boost at the individual and community scale.
Tariffed on-bill financing is a natural step for utilities and customers committed to increasing energy efficiency and promoting renewables. The demonstrated success in markets across the U.S., especially those serving high concentrations of low-income customers, showcases its potential for meaningful economic impact.
Report originally published here.
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