Inclusive Utility Investment
Increasing deployment of efficient electrification upgrades for all buildings, especially households, is critical to addressing energy inequity in the United States and solving the global climate crisis. Inclusive Utility Investment is a promising approach to expanding access to cost-effective, comprehensive efficient electrification upgrades for utility customers, including those often underserved by utility energy efficiency programs.
Inclusive utility investment 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.
EPA worked with stakeholders to reframe what was formerly called “tariffed on-bill” (or “on-bill tariff”) with a term that is a more apt description of this financial mechanism and is based on best practices for strong consumer protections. The inclusive utility investment term is not tied to a trademark (for example, the Pay As You Save® system).
The core tenets below distinguish inclusive utility investment programs from other tariffed on-bill programs that do not require net savings estimates, as well as all forms of on-bill loans or third-party financing with on-bill repayment that are personal debts.
- Utility investment in energy services: The program does not entail consumer lending or personal debt. The tariff for site-specific utility investments specifies that cost recovery charges are part of the energy services at the metered location. Until the utility’s investment is recovered, the cost recovery charges automatically apply to any customer paying for service at the location with due notice of terms since they will also benefit from the savings generated by the upgrades.
- Site-specific analysis and resource savings estimates: Programs ensure modeled energy and cost savings are specific to the building to provide an accurate estimate on which to base the cost-recovery charge.
- Positive cash flow: The tariff requires that the fixed cost-recovery charges be lower than the estimated energy cost savings on an annual basis. Savings can be generated by resource efficiency or grid value including energy production that the customer is compensated for.
In an Inclusive Utility Investment program (sometimes known as a tariffed on-bill program), a utility provides up-front capital to pay for energy efficiency and electrification upgrades at a customer’s premises and recovers the cost of its investment through a fixed charge on the participating customer’s utility bill (hereafter referred to as a cost recovery charge). The cost recovery charge is calculated based on an approved tariff that takes into account measure and installation costs, administrative costs, estimated cost savings, and annual cash flow for participating customers.
Consumer protections are central to the design and success of an Inclusive Utility Investment program and as such are discussed in greater length in the sections below.
Unlike on-bill loan programs or third-party financing with loan collection on the utility bill, Inclusive Utility Investment programs do not disqualify on the basis of income, credit score, or renter status, thus expanding access to underserved customers. Any upfront customer investment (for an expanded set of upgrades) is optional, and because the cost recovery obligation is tied to the energy services at the metered location (and not an individual customer), the approach is a more attractive one for both homeowners and renters who are uncertain about continued occupancy at a particular location.
What is a utility tariff? A tariff is a legal document approved by a utility regulatory commission or oversight authority that defines the price(s) to be paid to utilities for energy and related services. Typically, each line item on a utility bill is a tariffed charge that has an associated tariff defining the terms for that charge.
The tariff specifies rates, conditions, rules, along with their applicability, eligibility, and related definitions. For example, a tariff for inclusive utility investment might include specific notification requirements for homeowners when renting or selling a home with energy upgrades.
Many of the upgrades targeted by existing Inclusive Utility Investment programs are part of the ENERGY STAR Home Upgrade, a set of high impact energy efficiency improvements designed to work together to deliver significant energy and costs savings for a healthier more comfortable home.
Well-designed Inclusive Utility Investment programs can help address important utility program needs and customer barriers including:
- Need for Greater Savings: One major challenge utilities face as they adjust their energy efficiency portfolios to meet savings goals from more comprehensive retrofit measures (i.e., HVAC, water heating and related building shell measures) is achieving the volume they need to drive savings at scale. Established Inclusive Utility Investment programs have demonstrated that customers are much more likely to move forward with offers compared to debt-based offers, therefore increasing uptake of impactful retrofits and utility savings.
- Availability or Access to Capital: More than one third of Americans report being unable to pay for a $400 emergency with cash savings, and 51% have subprime credit according to the U.S. Federal Reserve. Inclusive Utility Investment programs provide the up-front capital to move forward with retrofits that many Americans cannot afford or either cannot or will not finance through a loan. Credit checks are not necessary under this model. Participants assume no new debt. Some programs have used bill payment history to assess eligibility or identify customers in greatest need. The investment is made by the utility, and both the utility and the customer benefit from the upgrades, with cost-recovery from energy savings. If well designed and properly implemented, customers will pay less on their utility bills overall than before the upgrades (absent altering their usage habits or adding new load).
- First Cost: When coupled with rebate and incentive programs, Inclusive Utility Investments can lower and, in some cases, may eliminate financial barriers that prevent customers from investing in energy efficiency upgrades. Programs operating today leverage existing rebates from other programs, if available, to help lower first cost. Homes with high energy usage and high energy intensity (high energy use per square foot) are most cost effective for this model and typically see the largest reduction in up-front and overall costs.
- Mistrust & Complexity: Customers often do not trust the energy or monetary savings claims of trade allies who they perceive are motivated to close a sale. Consumers can be overwhelmed by the complexity of contracting. Exposure to high-pressure upselling and poor installation quality are major barriers that deter customer investment in efficiency improvements. To address these barriers, Inclusive Utility Investment programs ensure that adequate consumer protection protocols are in place to prevent participating Trade Allies from claiming inflated savings and to ensure high quality installations on 100% of jobs.
- Split Incentives: The model can effectively address a common barrier to decarbonization efforts in rental properties known as the split incentive between landlords and tenants. Because the upgrades and cost recovery are tied to the property and energy bill respectively, rather than an individual, it only requires agreement from both parties to initiate, and the benefits are realized by both parties the renter who pays the bill and enjoys the improved comfort and the landlord benefits from the improvement to the property and tenant retention.1
- Underserved Sectors: Another challenge facing efficiency and electrification programs is making sure that all customer segments tap into program offerings. This is particularly challenging for low- to moderate-income households and renters, which make up about 36% of households. Some Inclusive Utility Investment programs prioritize marketing and outreach to these customers, targeting high energy users with high-energy intensity. Many utility efficiency programs offer additional incentives and services for low- to moderate-income households, so it is important that customers are notified they may be eligible to take advantage of no-cost upgrades and services, providing contact information so they may pursue those options first. Inclusive Utility Investment programs are not a substitute for grant- based, free home weatherization programs because they typically cannot serve households that are curtailing their energy use or have homes with structural or health and safety issues that prohibit investment in upgrades until they are remediated. Coordinating (also referred to as braiding or stacking) available incentives and services can be particularly valuable to serving underserved sectors. Programs operating today leverage existing utility rebates, philanthropic grants, and free offerings such as the U.S. Department of Energy’s Weatherization Assistance Program, if available, to help lower costs and eliminate co-pays. To learn more about stacking between IUI with other programs, please see the case study on Midwest Energy’s How$mart program and the Kansas Weatherization Assistance Program (PDF, 230 KB).
1 The split incentive is a particularly pernicious market failure that plagues any number of energy improvement programs. Put simply, a “split incentive” market failure is said to exist when benefits of a transaction pass to someone other than the party paying the cost, which is a common phenomenon in renter-landlord relationships. (“Follow the Money”: Overcoming the Split Incentive for Effective Energy Efficiency Program Design in Multi-family Buildings by Don Hynek, Megan Levy and Barbara Smith, Wisconsin Division of Energy Services).
Most Inclusive Utility Investment programs to date have focused on energy efficiency and electrification upgrades in the residential sector, and as such, many of the learnings and examples provided are from the residential sector. However, Inclusive Utility Investment is also applicable to commercial and municipal customers, which can face similar renter-landlord split incentive barriers as residential customers. For example, Ouachita Electric Cooperative Corporation has upgraded a number of commercial and state government facilities and Eversource New Hampshire’s Smart Start program serves municipal buildings.
Since the obligation to pay the cost-recovery charge remains with the location's utility meter, it is important to consider upgrades/measures that are long-lived and likely to convey with the sale of the home or property. These typically include building shell measures (air sealing, insulation), hard-wired lighting fixtures and controls, central heating and cooling systems, duct sealing, and water heaters. Some programs include demand response measures such as wi-fi thermostats and water heater switches, as well as on-site solar photovoltaic systems. Future applications could include low-e storm windows, battery storage, smart or bidirectional electric vehicle chargers, and any measure capable of generating reliable cost savings.
Homes that are relatively energy inefficient and/or have older, inefficient appliances are the most likely to have fully cost-effective upgrade packages. To maximize the efficiency and success of programs, some utilities and program operators target marketing to households that use the most energy relative to neighboring households since these locations have the greatest energy and cost savings potential.
- A review of utility experience with PAYS® conducted by the Southern Environmental Law Center found the program model offered important consumer protections, particularly for vulnerable low-income customers.
- The review also emphasized that PAYS should not be viewed as a substitute for zero-cost energy efficiency and bill-payment assistance programs when these programs are available to a household.
- Where offers of additional services for low-income customers are available, utilities should ensure they provide information about these programs, as well as if these offerings are compatible with inclusive utility investment.
Ensuring robust consumer protections to avoid unintended consequences or exploitation should be a primary consideration when designing an Inclusive Utility Investment program.
The original Inclusive Utility Investment model was created by Harlan Lachman and Paul Cillo of the Energy Efficiency Institute and trademarked as Pay as You Save® (PAYS®) with the goal of providing a risk-free method for customers to receive and benefit from energy efficiency improvements. Additional best practices to complement the model and refine consumer protections have been developed by EEtility, a PAYS® program operator, and other utility and non-utility program operators.
The core tenets outlined above, which distinguish Inclusive Utility Investment from other models, provide inherent consumer protections. The following list includes greater detail about these attributes, as well as other leading, field-tested best practices for program design and operational practices that protect consumers.
- Site-specific energy and cost savings estimate: To ensure modeled energy savings provide an accurate estimate on which to base the cost-recovery charge, programs use field-tested software (e.g., software meeting the BPI-2400 standard); weather-normalized analysis with at least twelve months of the historical usage data at the location; the actual cost for the installed upgrades; and the existing equipment and building condition based on a site visit and assessment. Ideally, all significant resource savings should be counted. Note that the use of a cost escalator (which assumes a higher future utility rate) increases the likelihood that a participant could experience negative cash flows annually. For measures that generate value from on-site energy production, energy storage, demand flexibility, or other grid services (as opposed to energy savings), these savings estimate best practices may not be applicable.
- Positive cash flow: The tariff requires that the cost-recovery charges be lower than the estimated energy bill savings on an annual basis. Since the cost recovery charge remains with the meter, this protects the interests of future residents/tenants. For example, if an upgrade package is modeled to generate $600 in savings annually, a program may cap the cost recovery charges at $480 annually or $40 per month (i.e., 80% of the projected savings). For measures like weatherization that have an inherent variability between estimation and final commissioning, a larger savings estimate buffer e.g., 80/20, makes sense. For measures with higher savings certainty like solar and virtual power plants, a smaller margin could be applied, e.g., 90/10. Programs leverage existing rebates and incentives from other programs, if available, to help lower first cost.
- Customer choice: Participants are notified of no-cost programs available to them first so they can choose which program suits them best. Participants can choose to contribute an upfront amount (a co-payment) to get more than the estimated savings alone would support. For example, estimated savings may only support insulation and air sealing, while an HVAC upgrade can only be partially supported by the savings it generates. In this case, a customer could access the insulation and air sealing with no upfront cost. They could also choose to access the expanded package, including HVAC, by making an upfront co-payment of perhaps $500-$2,500. This one-time payment is far less than paying for an entire HVAC system out of pocket and is thus an offer that many customers find attractive as demonstrated by existing programs.
- Equipment warranties: Programs include extended equipment warranties and/or maintenance plans for free or at a discount to help ensure that customers realize benefits from the improvements throughout the cost-recovery period, and have provisions that reduce or eliminate the tariff repayment obligation should an upgrade fail through no fault of the occupant. Extended equipment warranties negotiated or purchased by the utility can help ensure that the utility investment is maintained, and customers realize benefits from the improvements throughout the cost-recovery period.
- Site-specific quality and verification after installation: The utility or program operator inspects and verifies the contractor installation quality and completeness of upgrades prior to payment. This may include testing (or verifying test results for) the upgrades through the use of blower doors, pressure pans, duct blasters, or infrared cameras.
- Monitoring of forward energy usage: With permission of the occupant, energy usage data is monitored for participating customers to help ensure consumption is in line with expectations and to identify anomalies.
- Anomalies are investigated and remedies are provided: When an anomaly that produces negative cash flow is discovered, the cause of the anomaly is investigated. When attributable to the program (as opposed to occupant choices), a consumer protection protocol may (1) remedy the problem at no cost to the participant (e.g., addressing faulty installation of a measure), (2) compensate the participant for any payments in excess of savings generated, and/or (3) adjust future cost recovery charges downward if necessary to reflect the actual savings realized from the upgrades.
- Programs end payments if an upgrade fails through no fault of the occupants and is not repaired: The occupant is paying for the utility cost-recovery in exchange for the services provided by the equipment. If the equipment is not providing services, then the occupant is not obliged to pay. If equipment failure can be addressed through a no-cost repair or replacement under warranty, then cost recovery charges are paused until the equipment is fixed or replaced. Once the equipment is functioning as designed, cost recovery charges resume for the remaining number of payments.
Avoidance of conflict of interest: Programs apply explicit strategies for avoiding trade ally, utility or program operator conflict of interest. For example, the trade ally that is paid to install upgrades is not the same entity that determines the estimated energy savings for the scope of work at each site. Additionally, the program operator and/or utility may be responsible for ensuring through post-upgrade analysis that participants realize the projected savings within expected margins; this helps ensure that the utility’s and program operator’s interests are aligned with the consumer’s interest.
Use of a third-party program operator: While some utilities choose to operate their own programs, use of an experienced third-party program operator can help maximize the benefit of other consumer protections (e.g., through expert use of energy audit and modeling software or well-established QA/QC practices). Regardless of whether a utility uses a program operator, approved contractors are typically responsible for the installation of upgrades (utilities may leverage existing utility contractor networks).
- Notice to subsequent owners/occupants: The tariff requires participants to provide notice to subsequent occupants prior to purchase or lease, including the monthly cost recovery amount, the cost recovery duration and end date, and the included upgrades and estimated savings. For example, this has taken the form of a notice filed with the real property record and, where applicable, a landlord agreement committing to disclosure prior to a prospective tenant signing a lease.
Additional important consumer protection considerations include:
- Budget billing - a tool that utility companies provide to help spread out annual utility bills into even monthly payments to avoid spikes in bills caused by seasonal fluctuations in energy use.
- Protection from disconnection as a result of cost recovery charge.
- Tenant protections from rent increases or displacement as a result of improvements through the use of deed restrictions or voluntary agreements not to raise rent included in the owner agreement for the program.
To date, programs have sourced capital from the U.S. Department of Agriculture (USDA) efficiency loans (for rural markets), rate payer funds, and the same sources they leverage for other infrastructure upgrades. Some Investor-Owned Utilities (IOUs) are pursuing the treatment of Inclusive Utility Investment as a regulatory asset where they earn an authorized rate of return on their expenditures, similar to treatment of supply-side investments. This may be an attractive option for IOUs that do not currently have adequate performance incentives for energy efficiency programs. Experience with Inclusive Utility Investment programs to date indicate a cost recovery rate above 99 percent. (Energy Efficiency Institute, 2022 Status Report).
Initial programs in the early 2000s started with pilot-scale initiatives to gain operational experience, and understand the magnitude of customer/member interest, and then refined program design and delivery to ramp up scale in the transition to permanent programs that have reached more than 1% of customers per year. Recent IOU programs have eschewed the two step approval process and sought approval of a permanent program from their commission. During the initial pilot or program and depending on scale, a utility with sufficient capital may decide to use internal funds. Regardless, it is never too soon to anticipate the need for capital beyond the pilot or year one program phase.
Depending on utility type, regulatory environment, and location, utilities may tap into one or more of the following sources.
*Some of these have not yet been used for Inclusive Utility Investments but are proposed for consideration.
- Private capital
- Inclusive Utility Investment programs can be particularly appealing for private capital investors to finance since they are backed by the credit of utilities as opposed to the personal credit of individual customers.
- Private capital investors will want to make sure that a utility’s credit rating is sound, however with new utility investments, it may also be beneficial to demonstrate that the benefits of an Inclusive Utility Investment program are able to pay capital costs, operating expenses, and interest on debt.
- Private capital for energy efficiency investment may be available to utilities from tax-equity investors and other private equity investors if 1) the Inclusive Utility Investment program is structured properly and 2) the underlying capital qualifies for Federal investment tax credit or production tax credit incentives. This is a more complicated approach, which would require creating a partnership, but it could offer a lower cost option to utilities and ultimately their customers. To date, this option has not been tested in the market for Inclusive Utility Investment programs.
- Federal resources:
- The EPA’s Greenhouse Gas Reduction Fund (GGRF)
- The USDA provides the following loans that can be used for the purpose of advancing energy efficiency and other distributed energy resource solutions through Inclusive Utility Investment programs in rural areas.
- Although rural electric cooperatives are the predominant user and beneficiary of these loan products, the Rural Energy Savings Program can be tapped by former USDA Rural Utility Service borrowers regardless of size and by other utilities for the purpose of serving rural areas (populations smaller than 50,000).
- The U.S Department of Energy’s Renewable Energy & Efficiency Energy Projects Loan Guarantees program provides loan guarantees to help address financing gaps for clean energy projects that utilize innovative technology to reduce, avoid, or sequester greenhouse gas emissions.
- The U.S. Department of Energy can also supplement state-administered clean energy programs, providing additional financial support to projects that align federal energy priorities with those of U.S. states.
- State and Local:
- *Green Banks can be partnerships between governments and private-sector investors to create low-cost and sustainable financing options to help make public funds go further in support of clean energy projects.
- *Revolving Loan Funds may present an opportunity depending on the scale of the program. The North Carolina Clean Energy Technology Center’s DSIRE database provides links to loan funds and other funding sources.
- Community Development Finance Institutions (CDFIs), such as Mountain Association in Kentucky, can loan capital to utilities with inclusive investment programs.
- The EPA Clean Energy Finance Toolkit provides additional information on state and local financing mechanisms.
Engaging both internal and external stakeholders in planning conversations can help in developing an Inclusive Utility Investment approach that meets utility and customer needs and is embraced by all – from regulators to the utility billing team. In Missouri, stakeholder engagement was so robust that the Missouri Public Service Commission decided to double the initial budget for the program offered by Ameren Missouri.
The following stakeholders are important to engage early in the process:
Internal stakeholders
- Billing system team
- Regulatory team
- Capital investments team
- C-Suite/Financial team
- Marketing team
External stakeholders
- Regulators
- Evaluators
- Consumer/Ratepayer Advocates
- Community Based Organizations
- Trade allies
Some programs under development are using stakeholder advisory groups in the program design process. For example, the Duke Energy Tariff-on-Bill (TOB) Working Group is an active group collaborating to help advise Duke Energy on planning for a possible future program, and the Equitable Energy Upgrade Program in Illinois requires that the Commission sponsor a workshop process with stakeholders to develop program guidelines.
Stay Engaged and Learn More
Interest and experience with Inclusive Utility Investment is growing across the country and as such program design and implementation strategies are likely to evolve over time. To stay engaged and learn more, please reach out to your ENERGY STAR account manager or email eeaccountmanager@energystar.gov.
This resource library may provide additional insights and learning