New energy technologies that give customers more control over their energy production and use have come down in cost quickly and substantially, causing customers to question their relationship with the hometown utility. Many utilities have understandably reacted with alarm to the rise of new low-cost resources that might reduce the revenues they earn through energy sales, disrupting their business model and challenging their natural monopoly status. Utilities are facing a need to evolve to accommodate these trends while simultaneously responding to new environmental standards.
The good news is that utilities have an opportunity to benefit from increased deployment of energy efficiency and distributed generation. Utility-run efficiency program budgets reached $6.3 billion in 2013, but third party financiers have largely dominated the distributed generation market to date. By leveraging their social mandate and aggregator status, utilities can become essential enablers for customers to take advantage of new investment opportunities in distributed generation and efficiency. By enabling or providing these services to their customers, they can fold the environmental and economic benefits of customer investments into their environmental compliance plans, making it cheaper and easier to meet EPAs Clean Power Plan (CPP).
Overcoming Barriers to Utility Investment
Customer-sited generation and efficiency cost money up-front, and then reap savings over the relatively long life of the assets. This front-loaded cost structure makes it difficult for many customers to take the plunge on major efficiency projects or installing distributed generation. But this same cost structure makes these resources perfect candidates for financing.
In decoupled or restructured regions, utility financing of efficiency has achieved important successes and continues to grow, but utility financing of customer-sited generation has not yet taken off in the same way. In some cases, utilities are disallowed from owning and operating customer-sited generation and in other cases they simply do not see it as good business under their current regulatory structure. Of course, market power issues must be carefully considered in each jurisdiction, but utility financing of low-carbon customer-sited generationalongside utility financing of efficiency projectsmay provide substantial value to many utilities that are looking for low-cost options to meet new EPA standards.
Beyond Clean Air Act compliance, financing offers utilities an opportunity to meet customer demand for clean energy resourcesmaking them available to more customer classes. For example, third-party financiers often require a credit score above 680 and disallow anyone who has filed for bankruptcy in the previous five years. This means there are plenty of customers out there who would be interested in installing distributed generation or undertaking efficiency improvements, but who are not currently served by third-party financiers.
In response to this market failure, several innovative financing models and new programs can make it easier for forward-looking utilities (especially those that buy, rather than generate, wholesale electricity) to take advantage of both efficiency and customer-sited low-carbon generation, while lowering bills for their customers and reducing their carbon intensity.
By enabling customers to finance efficiency improvements or distributed generation via a small payment on their monthly utility bill, on-bill financing can open up new options for utilities. Leveraging the utilitys access to large amounts of low cost capital and the authorization to collect repayment via tariffs, utilities can stimulate investment in electric, gas, and water efficiency as well as distributed generation and other types of customer-sited resources.
By establishing a voluntary tariff for customers that want to access the utilitys low cost of capital, a utility can offer terms of financing that enable building owners or tenants to purchase and install money-saving products with no upfront payment and no debt obligation. Pay As You Save (PAYS), a system developed by the Energy Efficiency Institute of Vermont, is one variant of on-bill financing that uses this approach, and it has already been adopted by twelve utilities in five states. Under PAYS, the utility recovers its costs for a customer-sited efficiency or generation investment by adding a site-specific charge to the customers bill that is less than the savings, resulting in lower bills for the customer right from the start. If utilities or policymakers want to provide incentives for any specific kinds of products, customers can reduce the total amount financed by taking advantage of concurrent rebate programs.
Those who reap the savings from efficiency or distributed generation pay for the products over time via their utility bill, but only for as long as they occupy the building. When a customer moves, the repayment structure is transferred to the next customer at that site who continues to enjoy the savings. This kind of repayment structure reduces risk for utilities as financiers. It leverages the existing billing relationship between customers and utilities, and the right to disconnect as a remedy for delinquent accounts increases repayment rates.
The PAYS system has three essential elements: on-bill financing, locational contracts tied to the meter rather than the individual customer, and independent certification of the energy upgrades by contractors for quality assurance. As a result, the PAYS system has stimulated more than $20 million in voluntary customer investments in efficiency. Evaluations of these kinds of programs have shown that it raises customer participation in energy efficiency programs, promotes more substantial retrofits, and naturally encourages third party participation.
Source: The Energy Collective
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