The climate-related events of the last several years have reminded us of the vital importance of a reliable and affordable energy supply. The California blackouts, the Texas freeze, and ongoing threats to resiliency from fires and other weather-related events provide stark reminders that a reliable energy supply can no longer be taken for granted. As the impact of climate change becomes increasingly hard to ignore, customers are making even more decisions—independent of their utility—to ensure the reliability of their own power supply. In fact, with self-supply approaching grid parity in some places, customers with the financial means are more in control of their energy destiny than ever before.
Recent studies predict that the growth of distributed energy resources in the U.S. will increase the importance of the residential sector in serving grid needs as the load management potential of the sector grows to 215 gigawatts by 2025. Further, when these customers’ behind-the-meter resources are aggregated, they can be managed as a “virtual power plant” and used to smooth and firm what will be an increasingly renewable—and intermittent—supply-side resource mix as the industry decarbonizes. Distributed, equitable and balanced demand and supply will be the yin and yang of our clean energy future.
The energy equity gap
At the same time, the energy equity gap continues to widen. Because public policy initiatives meant to incentivize residential rooftop PV tend to benefit the wealthy, low-to-moderate income (LMI) customers are bearing an increasingly high energy burden. If not addressed, this gap will erode the societal and economic benefits associated with a clean energy future—benefits that should ideally accrue to all customers. In a world where the grid is critical enabler of clean energy at scale, new regulatory constructs and customer programs are needed that fairly allocate costs and benefits and recognize that we are all customers in a clean energy future.
For example, those customers with the financial means are purchasing generators or installing on-site solar + storage at record rates. Generac, a provider of stand-by generators, saw their 2nd quarter 2020 earnings grow by over 27%, which they attribute to a growing “home as a sanctuary” trend. Sunrun, a leading distributed energy resources (DER) provider of residential solar + storage products and services, reported having a networked solar energy capacity of 3.9 gigawatts in 2020. The company has over 550,000 customers and projects to accelerate growth to 20%-25% in 2021. And at last count, Ford has received over 100,000 pre-orders for its F-150 Truck Lightning model, which Ford claims will be able to power the average home for three days.
Clearly, some customers are taking matters into their own hands. These more affluent customers are the least price-sensitive and the least likely to avail themselves of tools to manage their demand to save money. When it’s 115 degrees in Portland, customers with financial means are motivated by comfort and well-being, not the potential to save a few dollars by participating in a dynamic pricing program. Further, time-of-use rates, demand response, and other economic incentives mostly succeed to the extent that consumers are price sensitive. To paraphrase the political scientist E.E. Schattschneider, the flaw in the clean energy heaven is that the heavenly chorus sings with a decidedly upper-class accent.
At the same time, access to clean energy solutions, including both efficient and smart appliances, as well as solar and storage, continues to be a challenge—or completely out of reach—for many people with low to moderate incomes. As many studies have shown, LMI customers carry a disproportionate energy burden. In addition, recent studies have shown that LMI communities are impacted the most and suffer the longest recovery period as a result of storms, blackouts, and climate-related events.
As policy makers have long recognized, policies designed to accelerate the adoption of rooftop PV shift the fixed costs of maintaining the grid to remaining customers who often have the least means to pay. In a recent California regulatory filing, Cal Advocates calculated that the cost burden generated by the current Net Energy Metering tariffs—paid for by non-participating customers—totals $2.85 billion dollars (in 2021 dollars) annually. If not addressed, the cost burden to be paid for by non-participants will grow to $6.62 billion annually by 2030. As Cal Advocates points out, the current tariffs are unsustainable, and proceedings are ongoing with the goal of developing a more equitable solution.
The customer of the future
While much ink has been spilled describing the “grid of the future,” less attention has been paid to the “customer of the future” and how core principles of equity and fairness will play out in our clean energy future. Selective uptake of clean energy solutions means that utilities might need to move away from strictly transactional customer relationships and toward more intentionally inclusive clean energy programs.
Why is it that BlocPower is considered “groundbreaking” for figuring out how to decarbonize buildings in low-income neighborhoods? Why are the health benefits of clean energy homes not more directly linked to the cost-benefit calculations of utility programs? The current regulatory emphasis on outdated cost-effectiveness metrics obscures the fact that the benefits of modern technology are unevenly distributed within our communities.
These questions will not just need to be addressed in places like California and New York, where clean energy policy is most advanced, but across the country as accelerating technology and opportunistic 3rd party business models are emerging to respond to customers’ needs. DER providers and private aggregators are taking advantage of outdated regulatory constructs and pricing models to forge entirely new business models.
While these models benefit the provider/aggregator and customers who participate, they will harm those customers who do not—or cannot—participate. This is because these business models rely on the utility’s infrastructure, which causes a cost-shift to occur where the utilities’ avoided cost is less than the customer’s bill savings. This delta, which is significant, is paid for by all customers while only benefitting a few. In the meantime, regulators across the country are navigating diverse agendas representing the interests of DER providers, utilities, and other stakeholders, who are often working at cross-purposes towards individual agendas rather than developing solutions that benefit all customers equitably.
Four steps to clean and equitable customer programs
In our new decarbonized future, how will we ensure that the benefits extend to all customers? What role do utilities vs. 3rd parties play? What does a future look like that serves all customers equitably and how do we get there from here? We recommend considering these four steps:
- Adopt a “customer as partner” point of view.
To enable a true partnership with all customers, utilities will need to view their customers with empathy rather than endpoints on the distribution system. This will require a deep understanding of behavioral science and customer analytics to gain an appreciation of what customers really value. What tradeoffs will they consider (e.g., sustainability, resiliency, reliability, affordability, health, safety) and how their energy management needs and behaviors might change—or be changed in exchange for incentives or rewards?
Further, products and services for economically challenged customers must be designed specifically to work within the economic and social context of these customers and address how these customers get their information, whom they trust, where they shop, etc. Products, services, and programs need to be designed to align with these customers’ values to ensure fair and equitable access to future clean energy programs.
- Repurpose utility DSM programs to enable DERs.
Utility programs that leverage public good charges can be designed so that the costs and benefits associated with clean energy solutions are socialized equitably across all customers, not just those customers being served by DER providers who channel value from non-participants. These utility programs should, in part, be compensated based on delivered kWh/kW tied to the grid’s operational needs and be required to meet certain grid performance standards. To ensure investments needed to modernize the grid are aligned with customer value, utilities will need to take a more active role in the enablement of DERs to benefit all customers.
Utility programs, such as the Connected Solutions program that provides funding through the Massachusetts’ state energy efficiency program, can incentivize the aggregation of Bring Your Own Devices and other grid-connected distributed assets. These types of programs should target hard-to-reach customers and should coordinate with financing and incentives discussed below to facilitate their accessibility. Additional value can be provided when programs are used to manage flexible demand in an optimal way—coordinated with supply-side resources—to ensure that benefits accrue to all customers, not just those with the financial means.
- Leverage low- or no-cost clean energy financing.
Green Banks and other sources of 3rd party capital are looking for opportunities to invest in clean energy solutions; they can lower or eliminate the initial upfront costs of these solutions when amortized over the life of the asset. These portfolios are increasingly considered “bankable” by savvy investors due to declining technology costs and the predictability of energy consumption (and resulting avoided costs) at scale.
In addition to Green Bank financing, utility on-bill financing/on-bill repayment (OBF/OBR) and tariffed on-bill (TOB) approaches—such as those being considered by Xcel Colorado—can increase accessibility and reduce the up-front costs of new clean energy technologies. Depending on the type of transaction, utility customers can make cost-saving energy improvements and repay the project costs over time on their monthly utility bill. Other approaches such as adding an energy equity surcharge to resource procurements or leveraging public goods charges are other ways to fund LMI programs without adding non-recourse debt burden on these customers.
- Develop an ecosystem view.
The new energy ecosystem will require a more collaborative and interdependent “all-hands-on-deck” approach, including collective contributions from various parties—the utility (and their infrastructure), customers, environmental groups, DER providers, aggregators, technology control platforms, and device manufactures. All should be fairly compensated for the value they provide. Proper incentives, cost allocation mechanisms, and tariffs will all have a role to play in establishing an equitable platform for all customers.
Ultimately, this cooperation and coordination will result in more customers being able to participate in and benefit from a clean energy future—because we are all customers, and we are all in this together.