Engaging Utilities in Building Electrification
Jessica Shipley, David Farnsworth and Camille Kadoch, RAP
Regulatory and utility involvement in building modernization is split into two parts in this toolkit: electrification regulatory provisions and gas regulatory provisions. This part focuses on electrification actions carried out by either electric or gas utilities. The Gas section of the toolkit focuses on regulatory actions to improve gas planning, gas and electric utility coordination, and planning for increased electrification that affects gas infrastructure decisions, including clean heat standards.
Building electrification presents an opportunity not only to provide the same energy services more efficiently and at lower cost but also to integrate buildings into the electric grid as a flexible load and make more efficient use of our electric system. Electrification has the potential to realize more efficient grid operations and thus lower consumer costs. That potential is prompting some states to turn to utility regulators and utilities to advance building electrification, in addition to the energy efficiency and weatherization programs many states already require utilities to administer. Legislation in some states is now requiring electric or gas utilities (or both) to develop plans for beneficial electrificationbeneficial electrification Electrification that saves customers money, enables better grid management and reduces negative environmental impacts. that include providing utility customers with financial incentives for heat pumps and water heaters, as well as programs to integrate these electrified devices into the grid. States have taken varied approaches to defining “beneficial electrification,” as discussed below. Proponents suggest that electrification is beneficial if it seeks to exploit the inherent flexibility in electrified loads to optimize grid resources, cut costs and reduce environmental harms over the lifetime of the electrified end use.
Considerations for Engaging Utilities
Utilities are natural partners for beneficial electrification and building modernization efforts.
- Utility strengths include technical knowledge and existing business relationships with all the energy users in their service territory as a provider of “energy service.” Utilities also have access to every building, whether it is single family or multifamily, owned or rented, commercial or residential. Thoughtfully structured utility-funded programs enjoy this access to homes and businesses without many of the barriers that market-driven or state incentives may face. For instance, state-funded rebates and tax incentives often involve cumbersome application processes. Electrification programs can also be coordinated with existing utility energy efficiency and weatherization efforts to ensure the greatest public benefit.
- Utilities have considerable electric system expertise and the ability to manage demand. Being “affected with the public interest,” utilities are in a unique position to lower the overall cost to society from electricity demand. Customer investment in efficiency, electrification and weatherization can reduce the need for utilities to invest in costly new power supply and distribution system capacity.
- With careful oversight from regulators, utilities can make the necessary capital expenditures to accomplish electrification goals and ensure electrification investments result in the greatest public benefit.
- Utility programs provide potentially greater longevity and certainty than taxpayer-funded investments. Taxpayer funding of weatherization programs and renewable energy has fluctuated with political circumstances.1 Inconsistent availability of funding decreases consumer confidence and uptake in policies.
Energy efficiency investments by utilities are funded in many states by ratepayers because energy efficiency provides so many benefits for the electric system, ratepayers and the climate. Proponents of this approach argue that beneficial electrification investments, particularly in areas that have limited market potential such as low- and moderate-income areas, have the same public benefit analysis as energy efficiency programs and should likewise be funded by ratepayers.
Not all support the idea of ratepayer-funded electrification, either in buildings or transportation. Arguments against ratepayer-funded electrification seek to address concerns such as the following.
- Utility involvement may suppress development of a competitive electrification services market. Electrified space and water heaters, for example, can be provided by third parties, such as heating, ventilation and air-conditioning (HVAC) contractors. Policy can include specific provisions to encourage the development of a market with many actors, providing options to consumers. These provisions could include a requirement that utilities engage local HVAC contractors or seek competitive bids for direct installations to help grow the market of capable installers.
- Without regulatory requirements to do so, utilities do not have incentives to efficiently manage electricity demand or control costs. Electrification will grow utility load, and a concern is that this will happen in an unmanaged way to the detriment of customers and/or the environment. Regulatory oversight can ensure that electrification serves the public good by helping optimize resources on the grid and lower lifetime economic and environmental costs.
Decision-makers considering ratepayer-funded beneficial electrification programs should consider wholistically the programs that are taxpayer funded, such as rebates and incentives, versus ratepayer-funded incentives and investments.
Engaging Regulators to Promote the Public Interest
Regulators have an essential oversight role to ensure that utilities pursue electrification in a way that promotes energy equity and secures value from electrified end uses. Yet traditional regulation does not incentivize utilities to efficiently manage electricity demand or keep costs in check. Without requirements to do so, utilities may not deploy program resources in ways that address historical inequities and promote equitable outcomes.
Regulators also understand and have experience with the planning processes by which a utility prepares for the future. In this undertaking, stakeholder input is gathered, and regulators, utilities and stakeholders assess the utility’s financial health and define an operational plan to serve its customers. Planning has always been a critical aspect of utility operations, but its importance is heightened during periods of high technological and policy change like we see today.2
Regulated utilities engage in several planning processes, including integrated resource planning,3 distribution system planning4 and more narrow planning, such as transportation electrification plans and now building electrification plans. In general, planning processes seek to compare and evaluate many different energy resource options — on the supply, demand and grid sides alike — in an integrated fashion to arrive at the plan with the least overall cost and greatest public benefit.5
Technological advances have furthered a paradigm shift in the traditional utility planning process from an almost exclusive focus on energy supply (i.e., managing generation sources such as wind, solar, fossil gas, coal and nuclear) to a more integrated analysis that includes both supply-side and demand-side levers. Demand-side levers include customer-sited large- and small-scale renewables, smart meters, connected household devices, storage, demand management, energy efficiency, vehicle electrification and consumer engagement programs. Engagement of demand resources and technologies provides grid operators with much-needed flexibility to effectively integrate and balance least-cost resources on the grid. For instance, energy efficiency programs can decrease load, while vehicle charging and space and water heating can be shifted to times when a grid operator has abundant resources, such as when variable renewable energy is available.6 These technology and resource changes are unlocking opportunities for utilities and customers to save money. In a time of rapid change, such as our own, the planning process becomes all the more important.
Why Is Legislation Necessary?
Legislation may be necessary if an existing state agency such as a utility commission is not already authorized to take action on electrification. In some states, legislation may be necessary to remove barriers to beneficial electrification, such as a prohibition on load growth for conservation activities or on fuel-switching. And if the legislature wants to require actions, legislative direction may be necessary to require regulatory commissions and utilities to plan for beneficial electrification activities that promote equitable outcomes.
To date, legislative direction for utility-funded programs on beneficial electrification has been utilized to overcome some important barriers to building electrification and modernization. Participating in building efficiency, electrification and weatherization is especially difficult for low- and moderate-income customers. These improvements frequently have a higher initial cost than many other fossil-fueled alternatives. Low- and moderate-income communities are often characterized by old houses or apartment buildings with structural and maintenance issues, which require separate investment for home repairs before the installation of new energy equipment is possible.7 Just as with other energy efficiency investments, there exist split incentives for rental properties. Renters, not building owners, commonly pay energy costs. Owners thus have little incentive to pay for efficiency improvements that would lower costs. Renters also lack the property rights to make the decisions required to electrify their homes, such as switching out water heaters, stoves or other appliances and upgrading the building’s electrical lines and panels. The costs of these improvements fall to the owner. Directing utilities to fund these improvements can overcome some of these barriers.
There are other barriers that legislation could redress. Some states prohibit utilities from pursuing activities that would increase load. Other states prohibit fuel-switching, resulting in efficiency programs promoting only in-kind appliance changes, a lost opportunity for greater savings. Many utility regulatory commissions do not feel that they have the authority to recognize beneficial electrification as a least-cost resource, or as a resource that may count toward state climate goals. Also, most states lack the direction to coordinate gas and electric utility planning in a way that would better account for all investment-related costs (see Gas in this toolkit).
The legislative provisions below feature ways states have addressed these barriers.
These options provide examples of how state legislation has directed regulatory commissions and utilities to engage on beneficial electrification in a variety of ways, including:
States vary in how they implement these policies, and not all options will be appropriate or immediately possible for all states. States can consider policies most applicable to their circumstances, picking and choosing to customize to their needs while carefully sequencing opportunities for impact. Many of these options can be adopted simultaneously; they are not mutually exclusive.
Requiring Utilities to File Beneficial Electrification Plans
Many utility regulatory commissions do not feel they have the authority to recognize beneficial electrification as a least-cost resource or as a resource that may count toward state climate goals. Options in this section illustrate the variety of approaches states have taken to authorize electrification plans for electric and gas utilities. Public utilities operate in all states, but jurisdiction over them varies by state. The options below provide examples of how beneficial electrification plans may apply to public utilities.
This provision is largely based upon Colorado SB-21-246,8 which is one of the most detailed and direct legislative efforts at promoting beneficial electrification of buildings. This provision directs the public utilities commission to establish energy savings targets and approve plans under which investor-owned electric utilities promote the use of energy-efficient electric equipment in place of less efficient fossil-fuel-based systems. While primarily directed at electric utilities, this option also allows gas utilities to provide beneficial electrification plans. Optionally, states could direct that their gas utilities file beneficial electrification plans as well. Legislators may want to consult with state regulators to determine the type of detail necessary to achieve the legislative objectives.
States such as Minnesota and Colorado have enacted statutory provisions that define beneficial electrification. The beneficial electrification definition from Colorado was modified below to reflect timing. Timing is a critical element of beneficial electrification, especially now. It is possible to implement an electrification measure that will increase emissions in the short term but substantially reduce emissions over the lifetime of the measure. Without this important addition, many electrification measures may be blocked over a short-term emissions increase, when they can produce long-term environmental benefits.
Option 1 shows modifications in brackets. Please check Colorado SB-21-246 for original language.
Colorado has greenhouse gas emission targets, and part of the requirements of the original legislation defines beneficial electrification in terms of a net reduction in greenhouse gas emissions and a reduction in societal costs. Beneficial electrification can be more broadly defined as electrification that reduces customer costs over the long term, reduces environmental harm and increases grid management capabilities. Electrified loads, such as those associated with water and space heating or EV charging, do not need to be “charged” — that is, draw energy from the grid — at the same time that they are being used. They are therefore inherently flexible and can enable energy storage. These loads don’t need to charge during the morning and evening peaks when power is more constrained, more expensive and potentially more polluting. These loads can be aggregated and cycled without impact to consumer comfort or can shift to other times of the day when doing so will cost utilities less to meet demand, help avoid overgeneration during the middle of the day and mitigate the steep ramping of generation resources needed to serve peak loads. Consequently, optional additions to a utility beneficial electrification plan could include reporting on grid flexibility benefits obtained by shifting electrified load to less expensive or less polluting times of day and customer bill savings that result from both the more efficient electrified end use and utility efforts to shift the load to less expensive times of day.
This provision also requires utility programs to focus on low-income households or disproportionately impacted communities. The original Colorado legislation directed at least 20% of the program funding to these communities. Customer engagement and outreach are also key to successful program uptake.
Option 1 Provision: Detailed Utility Beneficial Electrification Plan
(a) “Beneficial electrification” means converting the energy source of a customer’s end use from a nonelectric fuel source to a high-efficiency electric source, or avoiding the use of nonelectric fuel sources in new construction or industrial applications, if the action seeks to exploit the inherent flexibility in electrified loads to optimize grid resources, lower costs and reduce environmental harms over the 10 years expected lifetime of the electrified end use.
(b) As used in this section, “beneficial electrification plan” or “plan” means an electric utility’s plan to increase beneficial electrification in the residential, commercial and industrial sectors for purposes other than transportation.
(c) Investor-owned electric utility requirements:
(1) The commission shall allow an investor-owned electric utility to implement cost-effective beneficial electrification plans that support voluntary customer adoption of beneficial electrification measures.
(2) On or before [date], and thereafter as directed by the commission, but no less frequently than every [x] years, an investor-owned electric utility shall file with the commission an application for a beneficial electrification plan for regulated activities to support beneficial electrification. Beneficial electrification plans may be combined with other demand-side management strategic issues or transportation electrification plans, as applicable, but a beneficial electrification plan must, at a minimum:
(A) Include proposed programs to advance beneficial electrification for residential and commercial customers and may optionally also include programs to advance beneficial electrification for industrial customers;
(B) Include programs targeted to low-income households or disproportionately impacted communities, with [at least [20%][x%] of the total beneficial electrification program funding][more than 30%] targeted to programs that serve low-income households or disproportionately impacted communities. Programs targeted to these communities should include technical assistance to encourage use of the programs and shall not result in higher utility bills for building occupants;
(C) [Include programs to address split incentives between renters and landlords and prioritize buildings serving low-income residents];
(D) Include budgets; targeted numbers of installations; projected fuel savings; [projected customer savings]; projected cost-effectiveness calculations, including the elements required by paragraph (c)(4) of this section cost-benefit analysis; [indoor air quality projected improvements]; and other information deemed relevant by the commission for the plan as a whole and for each program included in the plan;
(E) Demonstrate that the utility will, to the greatest extent practicable, serve incremental electrification load with [a portfolio of resources that are expected to reduce total greenhouse gas emissions compared to the fossil-fueled option each resource is replacing over the lifetime of the electrification measures installed][a portfolio of resources that is planned to reach at least 90% free of greenhouse gas emissions by 2050 according to current utility planning processes and documents][least-cost generation resources, including the capital cost of infrastructure];
(F) [Demonstrate the grid flexibility and optimization benefits realized as a result of the beneficial electrification programs, such as the amount of load shifted and amount of renewable energy integrated by shifting load. Plans should include robust demand management programs and rate designs that are in place to utilize the flexibility beneficial electrification end uses provide;]
(G) Include incentives to facilitate beneficial electrification, with programs targeted to both new and existing building markets. Products eligible for incentives must be certified under the federal Energy Star program, or a successor program if that certification is available, in product categories for which such certification exists.
(H) Include an outreach plan that has received input from low-income advocates for engagement with customers in low-income households and disproportionately impacted communities to develop priority programs to support those customers in every phase of the utility’s beneficial electrification programs, including through incentives offered to multifamily buildings occupied in full or in part by low-income households; and
(I) Include documentation to show how the utility’s beneficial electrification plan is consistent with maintaining the reliability of the electric grid.
(3) Investor-owned gas utility requirements: an investor-owned gas utility [may][shall] file with the commission an application for a beneficial electrification plan for regulated activities to support beneficial electrification as part of such a proceeding or as a separate application. A beneficial electrification plan filed by an investor-owned gas utility is eligible for the same treatment as a beneficial electrification plan filed by an investor-owned electric utility pursuant to this section.
(4) The commission and investor-owned electric utilities subject to commission jurisdiction shall incorporate into the cost-benefit analysis of beneficial electrification plans and programs:
(A) An appropriate social discount rate;
(B) Other nonelectric system costs and benefits, including avoided environmental impacts;
(C) [Carbon option:
(i) The social costs of carbon dioxide and methane emissions, including the avoided carbon dioxide emissions from the direct combustion of fossil fuel in appliances or industrial equipment that is replaced with electricity;
(ii) The avoided upstream emissions of methane from the production and delivery of fossil fuel to the appliance or equipment; and
(iii) The incremental carbon dioxide emissions from generation of electricity.]
(d) Notwithstanding any other provision of law, the commission shall allow an electric utility to offer incentives to its customers to replace gas appliances with high-efficiency electric appliances. [Incentives 9for low-income customers shall be no less than [30%][x%] of incentives offered. The incentives offered for low-income customers shall cover [100%][no less than x%][commission discretion] of the cost of the highly efficient electric appliance, including connecting the new appliance.]
(e) The commission:
(1) Shall allow an electric utility to recover its prudently incurred costs, on a current basis, for implementation of approved beneficial electrification programs.
(2) May provide an electric utility an opportunity to earn incentives for exceeding beneficial electrification targets or emissions reduction performance targets that the commission has established for the beneficial electrification plan. For purposes of implementing this paragraph (e)(2), the commission may consider cost recovery or incentive mechanisms to promote the advancement of the utility’s beneficial electrification programs, which may include:
(A) An incentive rate of return on beneficial electrification investments for achieving or exceeding commission-determined targets;
(B) Allowing the utility to retain a portion of the net economic benefits of beneficial electrification;
(C) Allowing the utility to collect the cost of beneficial electrification programs through a rider or cost adjustment clause; or
(D) Any other incentive mechanism the commission deems appropriate.
(f) Each electric utility that implements a beneficial electrification plan shall submit to the commission an annual report describing the beneficial electrification programs implemented under the plan and demonstrating and documenting:
(1) Program expenditures, energy savings, incremental additional electric load attributable to approved beneficial electrification programs and incremental additional greenhouse gas emissions associated with beneficial electric load attributable to approved beneficial electrification programs;
(2) Assumed avoided greenhouse gas emissions from other sectors resulting from approved beneficial electrification programs;
(3) [The percentage of low-income customers participating in the utility beneficial electrification program as a percentage of all customers participating in the program. The commission shall review this percentage each year, and the utility shall revise the beneficial electrification plan program design and outreach program as necessary [until all reasonably possible low-income customers in the utility’s service territory have been reached;]]
(4) [Grid flexibility and optimization benefits realized as a result of the beneficial electrification programs, such as amount of load shifted and amount of renewable energy integrated by shifting load;]
(5) [Estimated customer savings on bills as a result of fuel-switching from fossil-fueled end uses to electrified end uses;]
(6) Societal costs and benefits of approved beneficial electrification programs as well as the techniques used to calculate those impacts; and
(7) Any other information that the commission requests.
(g) Municipally owned electric utilities, cooperative electric associations and wholesale electric cooperatives are encouraged to:
(1) Develop beneficial electrification plans as addressed in this section and transportation electrification programs that help their customers invest in beneficial electrification in buildings and transportation;
(2) Account for the social cost of carbon dioxide and methane emissions, set total energy savings and greenhouse-gas-emission-reduction goals and implement beneficial electrification programs for their customers;
(3) Include a beneficial electrification plan or transportation electrification program as part of a clean energy plan; and
(4) Participate in statewide or regional initiatives to increase the availability of, develop the market for, and support contractor training on high-efficiency electric technologies.
This option is based on Minnesota bill H.F. (house file) 751,10 which directed utilities to file a plan with the commission to promote energy end uses powered by electricity. Since electrification plans are a new area, many other states are directing a more proactive role for the commission to open proceedings. The option below adopts a more proactive role and directs the commission to open a proceeding to investigate, develop and adopt a framework for utility beneficial building electrification. The bill was introduced in 2021 but was laid over for possible inclusion in an omnibus bill. The beneficial electrification concept and many elements are included in the ECO Act, which is reflected in Option 4. The legislation articulates goals that the commission’s approach and utility plans should accomplish but leaves the regulatory requirements of how to accomplish these goals to the regulators. It also requires the commission to approve, reject or modify the plan, so that an approved plan is consistent with the public interest. This discretion on how to accomplish the details of regulation is particularly appropriate in new areas of regulation, such as utility building electrification activities. This provision may be modified to reflect additional goals.
Option 2 Provision: Public Utility Beneficial Building Electrification
(a) Not later than [date], the public utilities commission (commission) shall initiate a proceeding to investigate, develop and adopt a framework for implementing beneficial electrification plans for electric utilities with more than [size] customers by [x [days][months]] after passage. Beneficial electrification means converting the energy source of a customer’s end use from a nonelectric fuel source to a high-efficiency electric source, or avoiding the use of nonelectric fuel sources in new construction or industrial applications, if the result of the conversion or avoidance is to: save customers money over the long term, reduce environmental impacts over the life of the electrified end use and enable efficient utilization of grid resources.
(b) Plans considered and submitted should be designed to accomplish multiple goals and contain provisions that collectively accomplish these goals, which include:
(1) Maximize consumer savings over the lifetime of the investment;
(2) Maintain or enhance the reliability of electricity service;
(3) Support the integration of renewable and carbon-free resources;
(4) Encourage load shape management and energy storage that reduce overall system costs;
(5) Prioritize electrification projects in economically disadvantaged communities across various market and building types;
(6) Produce a net reduction in greenhouse gas emissions, based on the planned electricity generation portfolio of the public utility proposing the plan either over the lifetime of the conversion or by 2050, whichever is sooner; and
(7) Other goals or requirements the commission requires.
(c) The commission must approve, reject or modify the public utility’s plan, consistent with the public interest. Plans approved by the commission under this subdivision are eligible for cost recovery.
Consumer-owned utilities serve about 25% of the U.S. population, including cities and many large rural areas. These utilities include city-owned or municipal utilities governed by the city council or an elected commission. They also include public utility districts, which are utility-only government agencies, governed by a board elected by voters in the service territory, and cooperatives, which are private nonprofit entities governed by a board elected by the customers of the utility.11 The following option, developed from two bills introduced, but not passed, in Washington state,12 authorizes and encourages beneficial electrification plans for consumer-owned utilities.
The manner in which public power districts, municipalities and cooperatives are regulated varies greatly across the United States.13 This option encourages the relevant governing authority to adopt beneficial electrification plans. States where the public utility commission does not regulate public power utilities could follow this model or opt to include language that requires these utilities to file beneficial electrification plans with a particular state agency, such as the public utility commission or state energy office.
The findings provision for Washington Bill 2586 notes that it is “the intent of the legislature to achieve parity among all electric utilities so that each utility, depending on its unique circumstances, can determine its appropriate role in advancing home and building electrification for its customers.” Washington state has required investor-owned utilities to adopt electrification plans and required the utility commission to open a proceeding on building electrification plans. This option seeks to encourage public power utilities to likewise offer building electrification plans according to certain criteria.
The option specifies that the governing authority or commission may adopt a beneficial electrification plan as long as certain requirements are met — for example, that the benefits outweigh the costs, or that the plan must identify options and program schedules.
Option 3 Provision: Public Power Utility Beneficial Electrification Plans
(a) The commission of a public utility district, the governing authority of a municipally owned electric utility formed under [chapter of state law] and the board of a cooperative utility may adopt a beneficial electrification plan that establishes a finding that utility outreach and investment in the electrification of homes and buildings will provide net benefits to the utility and the public. Prior to adopting a beneficial electrification plan, the governing authority must request the input of any natural gas company serving customers in the electric utility’s service area on the development of the plan.
(b) A beneficial electrification plan adopted under this section must identify options and program schedules for the electrification of various energy end uses or other energy sources.
(c) In adopting a beneficial electrification plan under subsection (a) of this section, the relevant governing authority must determine that the benefits of its electrification plan outweigh the costs. As part of this determination, the governing authority may differentiate the level of benefits and costs accrued to low-income, highly impacted communities and vulnerable populations in the electric utility’s service area.
(1) The benefits of beneficial electrification considered by a governing authority may include, but are not limited to, system impacts, as well as the following:
(A) Utility revenue from increased retail load from beneficial electrification;
(B) System efficiencies resulting from demand response or other load management opportunities, including direct control and dynamic pricing, associated with the electrified retail load;
(C) System reliability improvements;
(D) The opportunity for indoor and outdoor air quality benefits to existing utility customers and customers from projects constructed after the effective date of this section;
(E) The opportunity for greenhouse gas emissions reductions from existing utility customers and customers from projects constructed after the effective date of this section;
(F) Customer savings over the life of the end-use electrification measures; and
(G) Other benefits identified by the governing authority.
(2) The costs of beneficial electrification considered by a governing authority must include, but are not limited to:
(A) The electricity, which must be demonstrated to have, during the life cycle of the electric appliance, a lower greenhouse gas emissions profile than direct-use natural gas or any other resources used to serve or offset the increased retail load from beneficial electrification;
(B) Any upgrades to the utility’s distribution system or load management practices and equipment made necessary by the increased retail load; and
(C) The cost of the incentive, customer outreach or other inducements used to encourage customers to electrify an energy end use currently served by a different fuel source.
(3) An electric utility referred to under this section may, upon making a determination in accordance with subsection (c), offer incentives and other programs to accelerate the beneficial electrification of homes and buildings for its customers, including the promotion of electrically powered equipment, advertising beneficial electrification programs and projects, educational programs and customer incentives or rebates. An electric utility offering such incentives and other programs must prioritize service to low-income and highly impacted communities in the electric utility’s service area.
(d) For the purposes of this section, “beneficial electrification” means electrification of an energy end use in a way that provides a net benefit to the utility consistent with subsection (c) of this section.
(e) Nothing in this section limits the existing authority of an electric utility formed under [cross-reference relevant state statute] to offer incentives and other programs to accelerate the electrification of homes and buildings for its customers if such electrification is in the direct economic interest of the electric utility.
Requiring Utility Energy Savings Goals and Fuel-Switching Plans
Many states have energy conservation statutes that prohibit load growth or fuel switching, thereby acting as a barrier to electrification. Beneficial electrification increases electric load, but because of increased efficiency of electrified end uses, it ultimately uses less overall energy and frequently decreases emissions. Option 4 shows how one state addressed barriers to electrification and prohibitions on fuel switching.
This option is based on Minnesota’s Energy Conservation and Optimization Act of 2021, known as the ECO Act.14 It is a good example for states that would like to encourage electrification and remove barriers to its adoption that may exist in state law.
Prior to adoption of the ECO Act, Minnesota law served as a barrier to electrification because it prohibited energy conservation measures from increasing load and prohibited fuel-switching entirely. The ECO Act allows utility programs that lower total energy use to count toward electric utilities’ energy savings goals even if electricity use is not reduced. Additionally, it allows efficient fuel-switching15 improvements, so utilities are able to offer programs that substitute electricity for a customer’s current fuel when those programs achieve a trifecta of: (1) reducing the overall amount of energy, (2) reducing greenhouse gas emissions and (3) reducing consumer costs.16
The amount of fuel-switching, or electrification, that can count toward energy savings goals under the ECO Act is fairly limited for investor-owned utilities but more generous for consumer-owned utilities. States may choose to modify this example and extend to all state utilities the broader application of electrification that Minnesota allows consumer-owned utilities, where cost-effective and approved by the public utility commission.
States may also want to consider the role of natural gas efficiency programs. The Minnesota legislation that inspired this option allows natural gas efficiency programs to count for energy conservation improvements. As noted by the American Council for an Energy Efficient Economy, some climate and energy experts have argued that the ultimate objective should be to transition away from fossil fuels and pursue electrification and to discontinue natural gas energy efficiency programs. Others argue that natural gas energy efficiency and beneficial electrification can and should coexist until the economics for customers to convert existing buildings from natural gas heating to electricity, particularly in cold-climate regions, are more attractive.17 Location-specific factors, including analysis of local economics and emissions impacts, should drive decision-making on the extent to which natural gas efficiency investments should be pursued. 18 The option offered below does not include fossil gas efficiency.
Option 4 Provision: Utility Energy Optimization Plans
(a) Energy savings and optimization policy goal:
(1) The legislature finds that energy savings are an energy resource, and that cost-effective energy savings are preferred over all other energy resources. In addition, the legislature finds that optimizing the timing and method used by energy consumers to manage energy use provides significant benefits to the consumers and to the utility system. The legislature further finds that cost-effective energy savings and load management programs should be procured systematically and aggressively to reduce utility costs for businesses and residents, improve the competitiveness and profitability of businesses, create more energy-related jobs, reduce the economic burden of fuel imports, and reduce pollution and emissions that cause climate change. Therefore, [it is the energy policy of [state]][the legislature directs the [public utility commission] to set] annual energy savings equivalent to at least [2.5%][x%] of annual retail energy sales of electricity and natural gas through multiple measures, including but not limited to:
(A) Cost-effective energy conservation improvement programs and efficient fuel-switching utility programs;
(B) Rate design;
(C) Energy efficiency achieved by energy consumers without direct utility involvement;
(D) Advancements in statewide energy codes and cost-effective appliance and equipment standards;
(E) Programs designed to transform the market or change consumer behavior, [including educate customers on the environmental and cost benefits of energy efficiency and electrified end uses];
(F) Energy savings resulting from efficiency improvements to the utility infrastructure and system; and
(G) Other efforts to promote energy efficiency and energy conservation.
(2) A utility [is encouraged to][shall] design and offer to customers load management programs that enable: customers to maximize the economic value gained from the energy purchased from the customer’s utility service provider and utilities to optimize the infrastructure and generation capacity needed to effectively serve customers and facilitate the integration of renewable energy into the energy system.
(3) The [public utility commission or relevant state agency] must provide a reasonable estimate of progress made toward the statewide energy-savings goal under paragraph (1) in an annual report to the legislature and make recommendations for administrative or legislative initiatives to increase energy savings toward that goal. The [public utility commission] must also annually report on the energy productivity of the state’s economy by estimating the ratio of economic output produced in the most recently completed calendar year to the primary energy inputs used in that year.
(1) “Efficient fuel-switching improvement” means a project that:
(A) Replaces a fuel used by a customer with electricity delivered at retail by a regulated utility;
(B) Results in a net increase in the use of electricity and a net decrease in source energy consumption over the life of the efficient fuel-switching improvement installed on a fuel-neutral basis; and
(C) Requires the installation of equipment that utilizes electricity resulting in a reduction or elimination of the previous fuel used.
(2) An efficient fuel-switching improvement does not include, and must not count toward any energy savings goal from, energy conservation improvements when fuel-switching would result in an increase of greenhouse gas emissions into the atmosphere over the life of the efficient fuel-switching improvement installed.
(3) “Energy conservation” means an action that results in a net reduction in energy consumption over the life of the efficient fuel-switching improvement installed.
(c) Public utility energy savings goals
(1) The [public utility commission] shall establish energy savings goals for [electric and natural gas utilities for] energy conservation improvements and shall evaluate an energy conservation improvement program on how well it meets the goals set.
(2) [The [public utility commission] may revise these energy savings goals annually.]
(d) Energy conservation and optimization plans
(1) The commissioner may require a public utility to make investments and expenditures in energy conservation improvements, explicitly setting forth the interest rates, prices and terms under which the improvements must be offered to the customers. The required programs must cover no more than a [three-year][x-year] period.
(2) A public utility shall file an energy conservation and optimization plan by [June 1][date], on a schedule determined by order of the commissioner, but at least every [three][x] years. Plans [may][must] include programs for efficient fuel-switching improvements and load management. An individual utility program may combine elements of energy conservation, load management or efficient fuel-switching. The plan must estimate the lifetime energy savings and cumulative lifetime energy savings projected to be achieved under the plan. A plan filed by a public utility by [June 1][date] must be approved or approved as modified by the commissioner by [December 1][date] of that same year.
(3) The commissioner shall evaluate the plan on the basis of cost-effectiveness and the reliability of technologies employed. The commissioner’s order must provide to the extent practicable for a free choice by consumers participating in an energy conservation program of the device, method, material or project constituting the energy conservation improvement and for a free choice by the seller, installer or contractor of the energy conservation improvement, provided that the device, method or material and the project seller, installer or contractor are duly licensed, certified, approved or qualified, including under the residential conservation services program, where applicable.
(4) The commissioner [may][shall] require a utility to make an energy conservation improvement investment or expenditure whenever the commissioner finds that the improvement will result in energy savings at a total cost to the utility less than the cost to the utility to produce or purchase an equivalent amount of new supply of energy.
(5) The commissioner shall consider and may require a public utility to undertake an energy conservation program suggested by an outside source, including a political subdivision, a nonprofit corporation or a community organization.
(6) A public utility, a political subdivision or a nonprofit or community organization that has suggested an energy conservation program; the [attorney general or consumer advocate] acting on behalf of consumers and small business interests; or a public utility customer that has suggested an energy conservation program may petition the commission to modify or revoke a department decision under this section. The commission may do so if it determines that the energy conservation program is not cost-effective, does not adequately address the residential conservation improvement needs of low-income persons, has a long-range negative effect on one or more classes of customers or is otherwise not in the public interest. The commission shall reject a petition that, on its face, fails to make a reasonable argument that an energy conservation program is not in the public interest.
(7) The commissioner may order a public utility to include, with the filing of the public utility’s annual status report, the results of an independent audit of the public utility’s conservation improvement programs and expenditures performed by the department or an auditor with experience in the provision of energy conservation and energy efficiency services approved by the commissioner and chosen by the public utility. The audit must specify the energy savings or increased efficiency in the use of energy within the service territory of the public utility that is the result of the public utility’s spending and investments. The audit must evaluate the cost-effectiveness of the public utility’s conservation programs.
(e) Recovery of expenses. The commission shall allow a public utility to recover expenses resulting from an energy conservation and optimization plan approved by the department under this section and contributions and assessments to the energy and conservation account, unless the recovery would be inconsistent with a financial incentive proposal approved by the commission.
(1) The [public utility commission] must work with stakeholders to develop technical guidelines that [investor-owned][consumer-owned] utilities must use to:
(A) Determine whether deployment of a fuel-switching improvement meets the criteria established in this subsection; and
(B) Calculate the amount of energy saved due to the deployment of a fuel-switching
(2) The guidelines must be issued by the [public utility commission] by order no later than [date] and must be updated as the [public utility commission] determines is necessary.
Prioritizing Low-Income Beneficial Electrification Programs
Some states direct utility beneficial electrification programs to focus on low-income and overburdened communities. In determining the percentage of utility program spending for this purpose, states may want to consider how other state-funded programs are reaching these communities. For instance, if other state programs, such as rebates or other incentives or weatherization programs that include electrification, are successfully reaching low-income and disadvantaged communities, less emphasis can be placed on ratepayer-funded efforts. However, if other state programs are not reaching these communities, a higher emphasis on ratepayer-funded programs for these communities is warranted. States may also consider the delivery of these programs. Some programs, such as weatherization and rebates, necessarily require applications, which can be daunting to consumers. Utility programs may present fewer administrative hurdles for people who could benefit from them if outreach and implementation are done well.
This option, based on legislation in Washington state,19 seeks to target programs to the individuals and communities that need them the most. To do that, the option focuses electrification and energy assistance funds on areas with the highest energy burden — that is, the largest percentage of gross household income spent on energy costs.
The drafters of the Washington legislation recognized that data are necessary to illuminate energy burden and the need for energy assistance. The bill requires a state agency to first gather data on energy burden within utility-specific territories. The legislation then requires the state agency and the utility to use those data to track the progress of utility programs.
Other states have taken similar actions but used different approaches to implement the program. California S.B. 147720 created a low-income building electrification program that requires gas corporations to provide incentives for installation of low-emissions electrified technologies to low-income customers. The California bill focuses specifically on low-emissions electrification systems as a method to help meet California’s greenhouse gas emissions goals. However, states may also choose to implement this type of provision for other reasons, including for securing customer savings, grid flexibility and as a means to improve indoor air quality. The California bill directs gas utilities to provide these incentives using a fund supported by the sale of greenhouse gas emissions allowances provided to gas corporations as part of the California carbon market. Other states could use an existing state fund for this or could allow utilities to recover their costs of investing in these types of programs.
Option 5 Provision: Prioritizing Beneficial Electrification by Energy Burden
(a) It is the intent of the legislature to demonstrate progress toward making energy assistance funds available to low-income households consistent with the policies identified in this section.
(b) An electric utility must make programs and funding available for energy assistance to low-income households by [date]. [Energy assistance shall include energy efficiency, weatherization and end-use electrification measures.]
(c) Each utility must demonstrate progress in providing energy assistance pursuant to the assessment and plans in subsection (d) of this section. To the extent practicable, priority must be given to low-income households with a higher energy burden.
(d) Beginning [date proceeding utility action], the [relevant state agency] must collect and aggregate data estimating (1) the energy burden, (2) energy assistance need and (3) reported energy assistance for each electric utility, to improve agency and utility efforts to serve low-income households with energy assistance. The [relevant state agency] shall use the U.S. Department of Energy’s Low-Income Energy Affordability Data (LEAD) Tool, or similar tool, to compile the data. The [relevant state agency] must update the aggregated data on a biennial basis, make it publicly accessible on its internet website and, to the extent practicable, include geographic attributes.
(1) The aggregated data published by the [relevant state agency] must include, but is not limited to:
(A) The estimated number and demographic characteristics of households served by existing energy assistance for each utility and the dollar value of the assistance;
(B) The estimated level of energy burden and energy assistance need among customers served, accounting for household income and other drivers of energy burden;
(C) Housing characteristics, including housing type, home vintage and fuel types; and
(D) [Energy efficiency, distributed energy resource and electrification potential.]
(2) Each utility must disclose information to the [relevant state agency] for use under this subsection, including:
(A) [Details of energy efficiency and electrification programs the utility currently offers for low-income customers, including eligibility criteria, application process steps and current outreach programs;
(B) The amount and type of energy assistance and the number and type of households currently served for programs administered by the utility;
(C) Data showing the number of successful enrollments in utility programs versus number of applications;]
(D) The amount of money passed through to third parties that administer energy assistance programs, and assessment data required by the utility to show third-party program success; and
(E) Subject to availability, any other information related to the utility’s low-income assistance programs that is requested by the department.
(3) The information required by (2) of this subsection must be from the electric utility’s most recent completed budget period and in a form, timeline and manner as prescribed by the [relevant state agency].
(1) In addition to the requirements under subsection (c) of this section, each electric utility must submit biennially to the [relevant state agency] an assessment of:
(A) The programs and mechanisms used by the utility to reduce energy burden and the effectiveness of those programs and mechanisms in both short-term and sustained energy burden reductions;
(B) The outreach strategies used to encourage participation of eligible households, including meaningful consultation with community-based organizations and American Indian tribes, and comprehensive enrollment campaigns that are linguistically and culturally appropriate to the customers they serve in vulnerable populations; and
(C) A cumulative assessment of previous funding levels for energy assistance compared to the funding levels needed to meet:
(i) Sixty percent of the current energy assistance need, or increasing energy assistance by 15% over the amount provided in 2018, whichever is greater, by 2030; and
(ii) Ninety percent of the current energy assistance need by 2050.
(2) The assessment required in (1) of this subsection must include a plan to improve the effectiveness of the assessed mechanisms and strategies toward meeting the energy assistance need by [x%] for the next biennial plan. [The utility plan for improvement must be developed after meaningful consultation with community-based organizations and American Indian tribes.]
(3) [The [public utility commission] shall adopt, modify or reject a utility proposal, after making findings on the record.]
(f) A consumer-owned utility may enter into an agreement with a public university, community-based organization or joint operating agency to aggregate the disclosures required in this section and submit the assessment required in subsections (c) and (d) of this section.
(g) Statewide evaluation
(1) The [relevant state agency] must submit a biennial report to the legislature that:
(A) Aggregates information into a statewide summary of energy assistance programs, energy burden and energy assistance need;
(B) Identifies and quantifies current expenditures on low-income energy assistance; and
(C) Evaluates the effectiveness of additional optimal mechanisms for energy assistance, including, but not limited to, customer rates, a low-income specific discount, system benefits charges, and public and private funds.
(2) The [relevant state agency], in consultation with the [public utility commission][utilities] and [low-income and overburdened community representatives and stakeholders], must also assess mechanisms to prioritize energy assistance toward low-income households with a higher energy burden.
(h) Nothing in this section may be construed to restrict the rate-making authority of the public utility commission or the governing body of a consumer-owned utility as otherwise provided by law.
(i) [To carry out its responsibilities under this act, the [relevant state agency] shall be allocated additional annual funds of [amount]. In performing its responsibilities under this act, the [relevant state agency] may select and engage outside consultants with experience in energy burden assessment.]
Farley, C., Howat, J., Thakar, N., & Su, J. (2021, December 16). Advancing Equity in Utility Regulation [Presentation]. Lawrence Berkeley National Laboratory. https://eta-publications.lbl.gov/sites/default/files/advancing_equity_webinar_slides_20211216.pdf
Explore Other Topics
- Trabish, H. (2022, February 21). Utility regulators eye new tools to ensure equity efforts don’t impinge on other policy goals. Utility Dive. https://www.utilitydive.com/news/utility-regulators-eye-new-tools-to-ensure-equity-efforts-dont-impinge-on/618384/
- Climate Cabinet Education, Regulatory Assistance Project & Pace Energy and Climate Center. (2022). Electric municipal utilities and the transition to a clean energy future: A guide for municipal utility leaders. https://climatecabineteducation.org/?page_id=16377
- An integrated resource plan is a long-term plan prepared by a utility to guide future energy efficiency, generation, transmission and distribution investments.
- This is also known as distribution resource planning. It is a process of planning to meet anticipated distribution system needs as customers use a growing variety of distributed energy resources.
- Lazar, J. (2016). Electricity regulation in the US: A guide (2nd edition). Regulatory Assistance Project. https://www.raponline.org/knowledge-center/electricity-regulation-in-the-us-a-guide-2/
- Climate Cabinet Education, Regulatory Assistance Project & Pace Energy and Climate Center, 2022.
- The Greenlining Institute & Energy Efficiency for All. (2019, October). Equitable building electrification: A framework for powering resilient communities. https://greenlining.org/wp-content/uploads/2019/10/Greenlining_EquitableElectrification_Report_2019_WEB.pdf. See also Billimoria, S., & Henchen, M. (2020). Regulatory solutions for building decarbonization: Tools for commissions and other government agencies. RMI. https://rmi.org/insight/regulatory-solutions-for-building-decarbonization/
- An Act Concerning Measures to Encourage Beneficial Electrification. S.B. 21-246, Gen. Assemb. (Colo. 2021) (enacted). https://leg.colorado.gov/sites/default/files/2021a_246_signed.pdf
- For different methods to structure incentives, see Funding and Finance in this toolkit.
- A Bill for an Act Relating to Energy, ch. 216B, H.F. 751, 92nd Cong. 2021-2022 (Minn. 2021). https://www.revisor.mn.gov/bills/text.php?number=HF751&type=bill&version=0&session=ls92&session_year=2021&session_number=0
- Lazar, 2016.
- Two bills introduced in the 2019-2020 legislative session would have required very similar plans from consumer-owned municipal utilities. See Concerning the Electrification of Homes and Buildings, H.B. 2586, 66th Cong., 2020 Reg. Sess. (Wash. 2020). https://legiscan.com/WA/text/HB2586/id/2126444; and An Act Relating to Reducing Statewide Greenhouse Gas Emissions by Achieving Greater Decarbonization of Residential and Commercial buildings, H.B. 1084, 67th Cong., 2021 Reg. Sess. (Wash. 2021). https://lawfilesext.leg.wa.gov/biennium/2021-22/Pdf/Bills/House%20Bills/1084-S.pdf?q=20220906090216
- American Public Power Association. (2014). Authority of state commissions to regulate rates of public power utilities. https://www.publicpower.org/system/files/documents/Rate%20Regulation%20of%20PP%20chart%20412.pdf
- An Act Relating to Energy, ch. 29, H.F. 164, 2021 Minn. Laws. https://www.revisor.mn.gov/laws/2021/0/Session+Law/Chapter/29/
- Fuel-switching, which simply means changing fuel sources to save money and reduce emissions, has been part of utility energy efficiency programs for decades. At one time, efficiency savings came from replacing electric resistance space heating equipment with on-site fossil-fueled space heating and water heating technology. Today, the opportunity is reversed: Cost-saving fuel-switching involves changing customer-side end uses from fossil fuels to more efficient electrical options. But the purpose of fuel-switching then was the same as it is now: Replace less-efficient fuels and their uses with cleaner, more economical alternatives. See Farnsworth, D., Shipley, J., Lazar, J., & Seidman, N. (2018) Beneficial electrification: Ensuring electrification in the public interest. Regulatory Assistance Project. https://www.raponline.org/knowledge-center/beneficial-electrification-ensuring-electrification-public-interest/
- Karol, G. (2021, May 19) ECO Act passes and paves way to modernize Minnesota’s Conservation Improvement Program. Minnesota Rural Electric Association. https://www.mrea.org/blog/member-co-op-news/eco-act-passes-and-paves-way-to-modernize-minnesotas-conservation-improvement-program/
- Kushler, M., & Witte, P. (2020). Sustaining utility natural gas efficiency programs in a time of low gas prices. American Council for an Energy-Efficient Economy. https://www.aceee.org/sites/default/files/pdfs/sustaining_utility_natural_gas_efficiency_programs.pdf
- Kushler & Witte, 2020.
- An Act Relating to Supporting Washington’s Clean Energy Economy, S.B. 5116, 66th Cong., 2019 Reg. Sess. (Wash. 2019) (enacted). https://lawfilesext.leg.wa.gov/biennium/2019-20/Pdf/Bills/Senate%20Passed%20Legislature/5116-S2.PL.pdf?q=20211208135249
- Act of Sept. 13, 2018, ch. 378, S.B. 1477, 2017-2018 Reg. Sess. (Calif. 2018) (enacted). https://openstates.org/ca/bills/20172018/SB1477/