Inclusive Utility Investment

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. 

Energy efficiency potential studies are an effective tool for building the policy case for energy efficiency, evaluating efficiency as an alternative to supply side resources, and formulating detailed program design plans. They are typically the first step taken by entities interested in initiating or expanding a portfolio of efficiency programs and serve as the analytic basis to inform the viability of programs in specific service territories. Conducting a potential study when exploring an Inclusive Utility Investment program is particularly important because these programs can be complex and won’t work in every customer scenario. Conducting a potential study will help program operators understand the landscape of variables to consider and identify the scenarios where Inclusive Utility Investments will be cost-effective and most likely implemented in the utility territory. At a high level, this means identifying the combination of variables that will likely result in customers having low to no copays. 

The National Action Plan for Energy Efficiency (NAPEE) Guide for Conducting Energy Efficiency Potential Studies outlines the steps to develop a potential study which can be adapted for evaluating an Inclusive Utility Investment program. The following potential analyses are referenced: technical, economic, maximum achievable, and program potential.

For Inclusive Utility Investment, evaluating the following variables will help identify if there are enough projects with low or no co-pays to make program investment worthwhile: 

1. Utility rates – higher rates and TOU rates can enable higher savings potential.
2. Weather – more extreme climates can enable higher savings potential. 
3. Program cost recovery options for design, implementation, capital, and return on equity.
4. Ability to capture savings from all fuels. 
5. Equipment and installation costs – higher costs could have an adverse impact on project economics.
6. Baseline building characteristics – number of buildings with potential for upgrades (e.g., buildings without insulation, or buildings that use electric resistance heating). 
7. Available rebates and ability to apply them to Inclusive Utility Investment projects. A common practice to reduce co-pays is to apply any available existing utility rebates. Pairing Inflation Reduction Act (IRA) Home Energy Rebates with an Inclusive Utility Investment project is another approach to reducing potential co-pays. IRA Home Energy Rebates began launching in 2024 and you can check the status of your state here: https://www.energy.gov/home-energy-rebates.

A list of example potential studies can be found in Appendix E of the Guide for Conducting Energy Efficiency Potential Studies.

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 applicable to all customer segments including commercial and municipal 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.

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 as these locations have greater energy and cost savings potential. A more comprehensive analysis of potential co-pays considering all the factors listed in the “How Can Utilities Determine if Inclusive Utility Investment is Right for Them?” section would increase the accuracy of identifying buildings with low or no co-pays.

To understand if Inclusive Utility Investment is a good fit for a specific utility, an analysis of estimated co-pays can be conducted for various improvements in various scenarios. This analysis could be very similar to a potential study usually done for traditional energy efficiency programs (see section above “How Can Utilities Determine if Inclusive Utility Investment is Right for Them?” for more information on potential studies). This type of analysis can help utilities understand if there will be enough projects with low or no co-pays to make program investment worthwhile. For more on co-pays, see Consumer Protection Best Practices #3: Customer Choice. 

Special considerations for low-income homes:

• Eliminate co-pays to the greatest extent possible. Thirty-seven percent (37%) of adults would have difficulty covering an unexpected expense of $400 (May 2023 Federal Reserve analysis). 
• Utilities should apply product rebates, including IRA Home Energy Rebates, to lower the cost of a retrofit project and eliminate co-pays for low-income households. 
• Do not discount projects that might need minor health and safety repairs or electrical upgrades. Inclusive Utility Investment programs can consider incorporating funds to subsidize health and safety repairs. For more information on this, check out the ENERGY STAR Workshop Incorporating Health and Safety into Home Energy Upgrade Programs. 

• 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.

1. 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.
2. 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.  
3. 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.
4. 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.  
5. 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.
6. 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.  
7. 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.
8. 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.

9. 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).

10. 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 National Clean Investment Fund (NCIF) is part of the GGRF. Under the $14 billion NCIF, the three grant recipients are establishing national clean financing institutions that deliver accessible, affordable financing for clean technology projects nationwide. 
  • 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.
    • Energy Efficiency and Conservation Loan Program
    • Rural Energy Savings Program
  • 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.

Before kicking off stakeholder engagement, it is important to conduct a potential study and bring data and recommendations to engagement sessions to focus discussions on the scenarios where IUI will work best. In the “How Can Utilities Determine if Inclusive Utility Investment is Right for Them?” section above, one of the last steps in developing a potential study is presenting the results. This is where stakeholder engagement should be conducted in the program development process. 

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 Equitable Energy Upgrade Program in Illinois requires that the Commission sponsor a workshop process with stakeholders to develop program guidelines.