Electrification 'Programs'

Deck: 

Time to Change the Game?

Fortnightly Magazine - August 2018

For electrification to reach its full potential, utility customers need to install electric vehicles, heat pumps, induction ranges, and other electrified equipment. In the past, when utilities have sought to influence consumer choices, they have launched "programs" to promote specific technologies.

These programs have featured products from light bulbs, to energy audits, to load-curtailment rebates. They have increased the energy productivity of the economy while saving customers money. It might seem logical to use programs to drive customer awareness and adoption of the newest electrified equipment.

Before going too far down this path, however, it would be wise to consider whether traditional programs provide the best template to promote electrification. Widespread electrification has some critical implications for utility operations - including potential downsides. It also presents a major growth opportunity for utilities.

As utilities and regulators weigh their options, they should look for flexible, faster-yielding initiatives better aligned with electrification's strategic potential. Setting up electrification programs in the model of energy-efficiency programs would trigger intensive planning processes, long launch times, and high administrative costs. Handling electrification proposals as an extension of core utility investments and operations could eliminate those hurdles and accelerate growth.

Avoid Programs' Weaknesses

At the April kickoff of EPRI's National Electrification Assessment, panelists and participants spoke of the need to launch "electrification programs." Details remain thin, however, as utilities and stakeholders work to define electrification programs.

Austin Whitman: But saving electrification from death-by-programs will be essential to achieve the growth that has the industry so energized.

It will be tempting to copy the approach of energy-efficiency programs. Their frameworks provide a familiar and transparent structure for goal setting, tracking progress, and ensuring customer funds are spent cost effectively. However, these structures may not suit the goals or potential of electrification.

Efficiency programs are slow and unresponsive. Program planning can take up to twenty-four months, and program frameworks leave little room for on-the-go adjustments. For a set of technologies evolving as rapidly as electrified equipment, this lack of flexibility could lead to the costly omission of new technologies.

Energy-efficiency-program evaluation depends on measuring energy savings, because program outcomes are measured in kilowatt-hours saved. Current measurement approaches have led to high overhead costs, and in some cases, loss of confidence in programs due to inaccurate results.

Utilities can address these problems by changing measurement techniques, for example, by adopting automated measurement and verification methods. They can also change program metrics, for example, by substituting downstream outcomes, such as overall system efficiency, for kilowatt-hour savings goals.

To enhance electrification's yield, utilities could commit to nimble or agile product launches, find ways to embrace the latest technologies, and adopt new metrics and measurement techniques.

Siloes Can Be Costly

Electrification's strategic and beneficial outcomes depend on full coordination across customer-facing and operational teams. If executed randomly, electrification can raise, not reduce, system costs. For this reason, it is important that siloes not form among marketers, product and program managers, and system planners.

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Even in decades-old energy-efficiency programs, using energy efficiency as a resource has remained elusive. This is because energy-efficiency programs live within their own regulatory plans, managed by their own internal teams, funded by their own budgets.

It will be essential to think of "electrification as a resource" from the get-go. Much of electrification's promise at the system level - not counting direct end-customer benefits - depends, on one hand, on ensuring load growth doesn't accelerate distribution investment needs, and on the other hand, ensuring electric end loads can be used strategically as assets to facilitate grid operations.

It will help to place load growth and electrification strategies into core utility operations and fund them through existing budgets. Alternatively, new spending proposals should comprise highly focused initiatives that offer transparency and ensure tight coordination with core utility operations. It will serve no one's best interest to place electrification in a bucket of its own.

Significant Upside

Utilities have better incentives to pursue load growth than load reduction. And electric technology delivers visible benefits to end users. So, achieving electrification may not require the same array of incentives for utilities and customers found within energy-efficiency programs.

Investor-owned utilities and municipal utilities collected three-hundred billion dollars of revenues in 2016, according to the U.S. Energy Information Administration. Achieving fifty percent growth on this baseline through electrification equates to a hundred and fifty-billion-dollar market opportunity. And that does not include potential sales of related products and services. Energy efficiency can't come close to that.

From the customer's point of view, electric equipment tends to use twenty- to thirty-percent less energy than fossil-fueled equivalents. This compares favorably to the ten- to fifteen-percent savings commonly found in whole-building energy-efficiency assessments. Electric technologies are changing how people use energy.

Forcing electrification into energy-efficiency-style programs would guarantee one thing: that utilities will hold off on promoting electrification for twelve- to twenty-four months until program structures are finalized, multi-year budgets are authorized, attendant personnel are hired, and the official program cycle gets underway. This delay would constrain market growth, rather than accelerate it.

A Path to Electrification

The clearest path to realizing electrification's potential in the near term requires a mix of traditional regulatory thinking as well as some proactive thinking - and yes, risk-taking - on the part of utilities. This should not be scary. Load growth through electrification offers utility CEOs the chance to increase revenues by half by taking over an adjacent market. The biggest concern should be how shareholders react if utilities turn down such a proposition.

But where to start? Energy-efficiency programs offer some additional lessons. Utilities have overcome efficiency market barriers such as customer confusion, lack of investment capital, and discomfort with risk. They have done this by educating customers, channeling rebates, monetizing savings, and in certain cases, providing investment capital.

For electrification projects, utilities can start with low-cost activities. Piggy-backing on other customer-engagement channels, utilities can begin inexpensively marketing electrification to their customers. They can do this through their core marketing funding, typically without separate regulatory authorization.

Next, utilities may consider offering customers incentives for electrification. Some of these incentives could be funded through shareholder funds, the same way that non-utility companies invest in acquiring new customers. (In typical corporate parlance, this is known as a marketing budget.) Other incentives may require regulatory approval but could be left to the utility to propose during rate-case proceedings.

Finally, for some aspects of programs, utilities may invest capital directly in infrastructure. Electric vehicle charging stations provide a good model for this. These programs would require requlatory approvals to ensure capital is being spent reasonably and to good effect.

The key? Start with the low-hanging fruit. Work responsively and embrace new technologies. Identify successive phases and fine tune the focus over time - just as many companies do with new product lines. Don't expect to ink a three or five-year plan that has all the answers.

Customer analytics, an emerging skillset within many utility teams, can support market segmentation and inform product promotions. For example, heat-pump marketing can target customers with the highest potential overall return on investment based on their current energy use and needs, building type, and past program participation.

Broad-based but targeted marketing campaigns can emphasize return on investment to customers and prioritize strategic outcomes that the utility has identified. Examples include decarbonization, mitigating system congestion, and integrating renewables.

Product bundling, often limited within traditional regulatory programs, should be encouraged to create alignment with complementary utility products. An example is bundling battery storage, electric hot water heating, and a new rate class.

Regulatory Reforms Can Increase Alignment

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The idea of placing "programs" within core operations is not novel. In fact, regulators in New York aim to pull all energy-efficiency program budgets into core utility operations so that energy-efficiency investment will become part of the rate-case planning and budgeting. Electrification "programs" would benefit from the same treatment.

Planners can also consider linking electrification to traditional demand-side management programs. This can happen by adding measures to existing programs, or creating fuel neutrality, an option Massachusetts stakeholders are currently weighing.

Performance-based ratemaking, implemented or under consideration in states such as Pennsylvania, Hawaii, and Minnesota, can complement electrification. PBR provides incentives for outcomes such as carbon-emission reductions, fuel switching, and grid flexibility, all of which can be served through conversion to electricity. Instead of counting heat pumps and energy audits, utilities could measure success through overall electricity sales and carbon emissions.

Expediency needs to be the name of the game if customers and utilities are to realize electrification's multiple benefits. This does not have to happen at the expense of cost-effectiveness. But saving electrification from death-by-programs will be essential to achieve the growth that has the industry so energized.