While Minnesota has historically had very low energy rates compared with other parts of the country and most of the world, electricity costs are rising rapidly and natural gas costs have become increasingly unstable. High energy prices particularly impact low-income households, who pay around 15% of their income for energy, as compared with 5% for the average household. Particularly for renters and low-income families, as well as small tenant businesses, without the ability to make improvements to reduce energy use, an aging and inefficient building stock is an increasing economic liability.
We see two main components of affordability: the price per unit of energy (rates) and the amount of energy consumed. While most public regulation of utilities is focused on keeping rates low, the actual economic impact on households and businesses is the total cost (rates multiplied by energy usage).
Due to increasing scarcity of fossil fuels and other traditionally dominant energy sources, we do not foresee energy rates going down as long as we are reliant on these sources. Electricity rates have increased by an average of 4% per year over the past decade in Minnesota. Costs for clean energy are rapidly dropping (and with zero fuel cost for technologies like wind and solar, will remain low over their lifetime) and are reaching cost parity with dirty energy sources, creating opportunities for long-term savings in the transition. However, dependence on our current utilities creates a perverse disincentive for this transition, because our current utilities have billions of dollars in old investments in dirty energy infrastructure that they are trying to pay off.
In the electrical sector in particular, where Xcel Energy also owns the generation facilities for energy, this means that when demand for utility power drops (either from using less energy or from generating more clean energy on site), utility returns on all those old investments drop. Because energy utilities are regulated monopolies and are guaranteed by state rate-making procedures to make profits on their investments, this causes companies like Xcel Energy to demand rate increases when energy use drops – most recently in the 2013 Xcel Energy rate increase of 8.6% approved by the state of Minnesota. If efforts to increase energy efficiency and generate more clean energy owned by energy users continue, this will create a steady upward pressure on electricity rates. This is not because these actions are more expensive, but because utilities are making less profit than they projected from past investments that they have made.
The impact on rates for heating fuel with Centerpoint is somewhat different because gas distribution companies tend to buy and sell gas on the market, and because Centerpoint’s rates have been de-linked from volume for the past 3 years. Essentially, they spread the costs of maintaining the distribution system around their customers and simply pass on the cost of the gas they buy. Rates for natural gas will most strongly be driven by the future price of natural gas. Because prices right now are artificially depressed by a glut on the market (many gas drillers are selling at a loss because there is so much on the market and it cannot be effectively stored in large quantities), we can expect the rates for natural gas to go up over time.
While the Minneapolis Energy Options campaign cannot, any more than the incumbent utilities, assure that we can keep rates at their current levels, we seek an energy future in which rates are at the same level or lower than they would be with our current energy providers. A transition away from dirty energy and natural gas can assist in keeping rates lower than they would otherwise be. Additionally, we think that there may be additional savings in electrical rates through a city-owned utility because it could allow us to avoid the perverse situation of increasing electrical rates when energy consumption declines. Nationwide, city-owned energy utilities have slightly lower rates than the investor-owned utilities in the same region, so municipalization is an option worth exploring. All strategies that can help keep our rates affordable should be thoroughly explored in the feasibility analysis that would begin if the city receives authorization from the voters.
The central area in which the Minneapolis Energy Options campaign seeks to advance affordability is by helping Minneapolis energy users reduce energy usage. Evidence from other similar nations (for example in Western Europe) and technical research by energy efficiency analysts nationwide show that most households and businesses (and our economy overall) could use around half as much energy for the same quality of life (research estimates range from 35% to 90% less energy, most Western European countries currently use around 50% less energy per person). While our ability to halt or slow the rise in rates is likely limited, energy efficiency can enable us to cut energy costs in half. Minneapolis Energy Options supports a massive investment in energy efficiency, including insulation and air-sealing, upgrades to heating and cooling systems, especially in commercial buildings, and ramping up efficiency of lighting, appliances, and electronics. While making these changes does entail major investment, it is substantially less costly for the amount of our energy needs “produced” (by avoiding a need for them) than generating energy in the first place. We support an efficiency first strategy that makes it even easier to create a clean energy future and makes our energy system affordable for everyone and competitive in the 21st century.
Advancing efficiency would require simple financing that is linked to the property and based on the savings it creates, not personal income. While an existing mechanism exists for this through Property Assessed Clean Energy (PACE), federal housing lenders have limited its use for residential properties. A city-owned utility (or our current utilities engaging more supportively in advancing energy efficiency) could open up a new financing avenue by financing energy efficiency (and clean energy improvements) on the monthly bill. Each month, a bill could show how much expense the improvements were saving compared with the cost of the loan repayment, demonstrating the cost savings from the first month. This financing mechanism could also be independent of household credit scores and could be linked to property’s utility meter, reducing the disincentive for transient residents to invest and encouraging landlords to participate.
Advancing energy efficiency for small businesses and residential neighborhoods will also require active community-based education and outreach to implement it widely. A block-by-block approach with leadership by community members, block groups, neighborhoods, and other organizations can both inform and engage a much higher proportion of energy users and reduce the costs of those improvements through bulk buying. Coupled with a simple and universally accessible financing option, we can start to achieve major reductions in usage that keep energy affordable for everyone.