FAQ: Inclusive Financing

from conversation with Dr. Holmes Hummel, October 11th, 2016

What is "Inclusive Financing" for energy upgrades?  a financing solution that offers all customers, regardless of credit score or access to upfront money, access to cost effective energy upgrades. This model uses a proven cost recovery model for both the customer and utility.

obr.jpgWhy is a "tariff-based" model so important? (from the Energy Efficiency Institute): "Wherever the grid reaches today, utilities have achieved near universal access by recovering investments through an agreement with customers called a "tariff." Champions of distributed energy solutions don’t enjoy tariff authority, which has led to the use of alternatives such as loans or leases. While the distributed energy technologies are scalable, financing instruments used today are not, and many customers are effectively locked out of these investments."

Why would the utilities make the investment?

  • Utilities are entitled to a return on the investment of 8% or more if they provide the capital (at least in the case of regulated Investor Owned Utilities, e.g. Xcel & Centerpoint)

  • But also attractive to utilities for several reasons beyond getting paid for their investment:

    • lower peak demand;

    • higher customer satisfaction;

    • more flexibility to incorporate intermittent sources of energy

Would the PAYS model work for rural electric coops?

  • All the states that have participated have rural electric cooperatives who have participated

  • What about in Minnesota though? Those in MN may be skeptical, but(!) there have been some exciting developments recently. Electric cooperatives have seen an atrophy of their member-based democracy over the last 80 years. In part because of the emergence of inclusive financing, co-op members are now asking themselves & each other “wait, don’t I own a piece of this business?” and starting to organize. The “WE OWN IT” campaign is a movement to revitalize electric co-op membership. This campaign has special resources available to help “decalcify” governing boards of co-ops and engage community in discussion.

How do we combat the utility argument that “they can’t afford to update their IT systems”?

  • Any utility that cannot figure out to specify investments to a specific place and recover costs from that place will, simply stated, not be prepared for the 21st century. They will not be prepared to accommodate distributed energy.

  • Costs are plummeting for innovations like distributed renewables, on-site solar, electric vehicles, and programmable thermostats.

  • Businesses like Best Buy and Home Depot will jump into sell these and more, whether the utilities do or not. But -  these businesses won’t be able to serve low-income customers because of the barriers, and then the utilities will use low-income energy-users as human shields and scapegoats as to why distributed renewables and smart technology shouldn’t be adopted.

  • So programs like PAYS are an in to say to utilities: “we’re here to help you - because you won’t survive the 21st century if you can’t upgrade your cash register”

How long are pay-back periods for energy upgrades and how do they work with Inclusive Financing mechanisms like PAYS?

  • Charge is capped at 80% of estimated savings over 80% of the useful lifetime

  • So if warrantied life of panels is 25 years, 80% of its useful life is 20 years

What happens when a metered site is demolished before the term of service is finished?

  • Two things are true - 1)Panels under warranty can be salvaged; 2) The utility is entitled to recover the rest of the asset and can take that out of the new project that goes up after demolition

  • Demolition has not been a showstopper in any of the states Inclusive Financing models like PAYS have been adopted

How could this work for wind power?

  • Because utilities can get low cost capital, they can get affordable prices for commercial scale development and use billing systems to recover costs.

Who owns energy upgrades when all costs are recovered?

  • For energy efficiency upgrades, it’s the owner of the building.

  • For wind and solar, the community members pay all the costs. With PAYS & other inclusive financing, there’s a pathway to ownership for projects like wind and solar.

PAYS looks like a trademark. Do states pay a fee to use it?

  • The trademark has three functions:

    • 1) to protect the brand name from being used (including by utilities) but without the consumer protections we’re talking about

    • 2) to compensate for the long and expensive utilities commission process that got it off the ground

    • 3) to provide a simpler, likely cheaper option than creating an inclusive financing program design from scratch

  • The Energy Efficiency Institute (EEI) allows it to be used for free unless the user can’t uphold the terms of the PAYS system. This protects the integrity of the program.

  • The EEI owns the intellectual property of the program design. That is not free. It can cost a fortune to send it through utilities commissions. It is so much more affordable than starting from scratch to design a program like this.

What’s the largest utility providing this around the country?

  • Technically, the largest is EverSource in the far Northeast, but they do not have the largest program. EverSource has restricted its program to municipal buildings, though they may be reconsidering now.

  • The largest program is Midwest Energy in Kansas. They’ve invested $8 million in more than 1,400 transactions over 8 years. Over that time, the cost recovery rate has been 99.9%. That gives you a sense of the structural stability of customers’ investments made through through tariff-based on-bill repayment

What is the best route for us to push this in Minnesota? What are key hurdles or barriers?

  • You do NOT need legislation to offer this. Every utility has the authority to offer terms of service to make investments in a certain location and recover costs from there. There are precedents for it happening without legislation.

  • Utilities that are subject to Utilities Commission oversight are profit-driven (so without oversight they might offer energy services at an unfair price). This means they have a social compact. The state energy office in MN and utilities commissions want to know about programs like this.

  • The first movers of programs like PAYS have been electric cooperatives. Electric co-ops are not leaders in every state, but those that have gotten organized move faster than those with regulatory hoops like investor-owned utilities.

  • You would be well matched to go into a direct dialogue with a for-profit utility, but you'll want to be prepared.

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