Incentives and Financing
Why It Matters
Financing can be a tool to unlock energy savings for all your customers, especially those who might lack access to affordable financing. A wide range of incentives and financing options are in use by utilities to ensure that low- to moderate-income members are able to participate and realize the benefits of electrification.
Rebates
Most utility energy upgrade rebate programs are designed to be simple while providing value to both the customer and the utility. The member provides proof of purchase (e.g., contractor’s invoice or retail ticket) and is reimbursed for the rebate amount. No energy audits or follow up are involved. Rebates are more complex to implement than providing energy efficiency tips, and a step below a comprehensive financing program for conversions.
Utilities are experienced in operating rebate programs, and contractors know how to incorporate these rebates into their sales pitches. Rebates could be expanded to better market and implement beneficial electrification measures. This could include adding new technologies to the rebate list, increasing the size of the rebates, or offering a premium rebate for fuel switching measures. Larger rebates may make sense given the revenue opportunities from electrification measures.
Many co-ops tend to align their rebate programs with those offered by their power providers or generation and transmission co-ops (G&Ts) to save on program costs. (G&Ts are large generation entities encompassing multiple local distribution co-ops, which also own the G&Ts). Participating in group rebate programs provides multiple benefits, especially for smaller co-ops with limited resources. Pooling labor, capital resources, and sharing a common marketing program brand helps sell the program while keeping the value for members. And this strengthens the relationship between the distribution co-op and their G&T.
Rebates are most useful to customers who have the upfront capital to invest in the upgrade. Therefore, rebates are likely to disproportionately go to middle-and upper-income households. This matches the customer segments that have traditionally been reached by energy upgrade incentive programs. The high cost of the appliances, possibly still quite high after a rebate is applied, reduces accessibility to the program and overall program uptake. When offered alongside accessible financing options, rebates can reach more members.
Common electrification-related rebates offered by utilities include:
Building Electrification
Residential heat pump water heaters
Residential air-source heat pumps
Residential induction cooktops
Commercial heat pump water heaters
Commercial air-source heat pumps
Commercial induction cooktops
Geothermal heat pumps
Dual-fuel heat pumps
Transportation Electrification
Level 2 residential electric charging stations
Level 2 commercial electric charging stations
Level 3 fast-charging stations
Agriculture Electrification
Irrigation pumps
Thermal electric storage systems
Non-Financial Incentives
Most utilities will offer incentives to help customers to increase their program participation which will not involve the exchange of dollars. These are in-kind services from the utility to the participants.
Offering free energy audits for energy efficiency retrofits and energy-related investments
Lists of certified contractors broken out by expertise areas
Help filing rebate paperwork
Field test reports for various technologies in your climate
Carrying away an old furnace or AC through appliance disposal and recycling programs handled and administered by the utility. These programs help with picking up and properly discarding energy-intensive fossil-powered space and water heating equipment.
Rate Structures
Most utilities divide their customers into residential and commercial and industrial (C&I). Then utilities subsequently divide rate structure into three categories which are reflected in the customer's utility bills: customer charges, demand charges, and others (fees, taxes, etc). For residential customers, most utilities charge a fixed cost for every kilowatt-hour (kWh) used regardless of the time of day that the power is used. Some utilities are innovating with their rate structures to incentivize customers to use less or more electricity depending on the time of day.
Time of Use (TOU) Rates
With TOU rates, the retail electricity prices depend on the time of day, day of the week, or season. Time-sensitive rates better reflect the fact that the cost of generating and distributing electricity is different at different times of the day. TOU rates also provide a market-based price signal to customers to charge their energy consumption behavior. By creating distinct and different temporal cost rate structures, utilities can incentivize customers to use less energy when energy demand is highest, generating savings for both the customer and the utility. For example, by charging more for the prices of electricity (in cents per kWh) during evening peak times (4-9 pm) utilities can incentivize customers to charge their electric vehicles or run their appliances during night times when electricity is more plentiful and energy demand tends to be lower.
Load Management/Control Programs
To decrease high energy demand during peak periods, some rural electric cooperatives – particularly in the Midwest – offer discounted electric rates to members that sign up for a load management program and couple it with a grid-connected heat pump, electric water heater, or EV charging station. Because electricity is more expensive for utilities to deliver during peak times, these programs incentivize customers to allow the utility to shift participating customers’ flexible energy demand to off-peak times. This helps the utility reduce its peak demand costs, creating energy savings.
Utility-Led Financing
Helping End-Users Overcome the Barrier of High Upfront Costs
Rural families and businesses are particularly vulnerable to experiencing high energy burdens, meaning dedicating more than six percent of their income towards paying energy bills because of inefficient housing stock and lack of well-insulated buildings. As a result, rural families face energy burdens up to 40 percent higher than urban households.
Often many of these families cannot afford the upfront costs associated with clean energy upgrades that would help them reduce energy costs and lower energy burdens because they lack the capital to pay for what traditional utility rebates do not pay for. Low- and moderate-income (LMI) households have traditionally faced barriers accessing capital, including for clean and efficient energy upgrades, due to below-average credit scores and the frequent inability to meet other traditional financial requirements.
Many renters (including businesses leasing their space) are also unable to afford or access rebates and incentives to help them invest in energy-related upgrades. They may be explicitly excluded from the program or unable to stay in the property long enough to justify the investment. There is an underlying split incentive issue between landlords and tenants who pay for their own utilities – the onus of property upgrades lays with the owner, but the bill-paying tenant is one who receives the immediate financial benefits. A creatively-structured financing program can clear this hurdle by having renters help pay for the energy upgrades via a portion of the induced energy savings, but only for as long as the renter remains in the property.
Financing for Beneficial Electrification
Energy-related financing enables families and businesses without cash or credit to afford the difference between the cost of a measure and the rebate offered. As a result, financing can make energy improvement programs more equitable by attracting customers who previously were unable to participate in existing programs. Financing can also create a viable pathway for more customers to pursue multiple measures and whole house/building improvements to capture more energy benefits and reduce their overall energy costs.
Financing is one way to help households and businesses repay the costs of energy-related investments over time. This type of financing involves a third-party financial institution or lender partnering with a utility that processes and services the customer’s loan. Although the utility may help market the energy efficiency financing program, the third-party lender generally manages all aspects of program administration. Third-party financial institutions, such as green banks, credit unions, local banks, and community development finance institutions (CDFIs), can be great partners for the utility to implement these programs.
There are several downsides to energy-related investments through third-party financing:
The connection between energy improvements and utility bill impacts is not clear.
The role of the utility is downplayed
Customers have two monthly bills to pay instead of just one, creating a “hassle barrier.”
Possibly higher program costs, as third-party administration costs are passed on to the customers through fees and higher interest rates.
Program participation could be limited by credit checks and other income requirements from third-party
Renters are usually not included in these financing programs
While these lending options provide a way to pay for energy-related investments over time, they are not equitable as their credit, income, and home-ownership requirements leave many families without access to these programs. More utilities offer on-bill financing programs that provide investments for energy efficiency and beneficial electrification projects regardless of credit, income, or renter status.
For more information on on-bill financing programs see here.