A Utility Business Model That Embraces Efficiency and Solar Without Sacrificing Revenue?
A few weeks ago the city council in Fort Collins, Colorado, unanimously voted to accelerate the city’s climate action goals to achieve an 80-percent reduction of greenhouse gas emissions by 2030 and carbon neutrality by 2050. The municipally owned Fort Collins Utilities understood the community’s desire for such aggressive action, which will be critical to the success of the effort, and has taken steps to better understand the utility’s role helping the community meet its energy transformation goals. One of those steps was working with RMI.
At first glance it may seem as though the utility's revenue is doomed to plummet—among other elements, the city's approach calls for a rapid scale-up of distributed renewables and building efficiency—but an exciting innovation suggests otherwise: the integrated utility services (IUS) model.
The IUS utility business model that RMI developed for Fort Collins Utilities: a) deploys energy efficiency and rooftop solar as default options for residential and small commercial customers, b) does so with on-bill financing and other mechanisms to ensure no increase in customers' monthly utility bills, and c) preserves utility revenue. This sounds like an unlikely, too-good-to-be-true combination, but our analysis shows that both municipally-owned utilities like Fort Collins Utilities and other member- or independently-owned utilities alike can achieve very real success.
Given the large changes the utility and its customers would have to make, Fort Collins Utilities approached us with a second set of questions that we think utilities of all stripes should consider:
• How can a utility help most of its customers participate in the energy transition (by investing in efficiency, distributed solar, or other opportunities)?
• How can a utility roll out these new services without disrupting or destroying its own revenue?
RMI, with the support of an e-Lab working group, the Colorado Clean Energy Cluster, and Fort Collins Utilities, set out to answer these questions through the design of a new utility business model. The result became the IUS business model.
This business model would help customers access a broader range of energy services—including efficiency improvements, distributed renewables, transport and heat system electrification, and demand response—in one comprehensive package, with monthly payments on the electricity bill. This integrated utility services model—the IUS model—could, if designed correctly, align a utility's interest in its financial health with the interests of customers who want to invest in efficiency and distributed solar, and make these investments appealing to a wider range of customers.
Key program features would include:
• A package of basic efficiency and distributed solar offerings that, when financed on a customer’s bill, do not increase monthly costs
• An integrated intake and service-delivery experience for customers
• A platform that allows for new services to be offered over time (and for innovative partners to participate in such offerings)
• An on-bill financing program that would leverage diverse sources of capital
Here’s how the program we developed could work. The utility would contact customers to notify them of the new program and the options available for their home energy goals. An experienced third-party provider would contact customers and walk them through a set of choices for a bundle of services customized to their home.
Contractors would then conduct audits and install measures in one fell swoop, keeping installation and procurement costs low. With high customer adoption and bundling offering a sort of “mass customization,” the utility could likely achieve economies of scale that would lower costs even further. Billing, quality control, monitoring and verification, and reporting would continue to be managed by the utility to ensure program success. Customer bills would reflect energy cost savings netted against service charges for the improvement measures. As the program delivered results, customers could consider upgrading for additional services such as new windows or a new refrigerator.
THE BOTTOM LINE
Our initial analysis shows customers could reduce their bills by roughly five percent when participating in the program’s basic, bill-neutral package. Since the customers' service charges, like power purchase agreements, need not escalate as fast as utility pricing (or at all), these savings could rise substantially over time, to as much as a 25-percent bill reduction by 2030.
Meanwhile, utility income could increase, as these services, many of which continue to experience technology-driven cost reductions, are likely to be more profitable than traditional sales of electricity. There is also room to sell new services (just as some utilities are now offering high-speed Internet).
THE WAY FORWARD
Utilities have an incredible opportunity in the IUS model and related approaches to leverage their direct access to energy customers and provide them with the very products that are traditionally viewed as a threat. While it will require establishing more nuanced billing and banking systems, among other capabilities, these challenges are not insurmountable. In fact, in many ways that is exactly what competitors such as SolarCity do well. Utilities have predominantly viewed their energy-services departments as money pits, administering cumbersome efficiency and rebate programs.
But perhaps it’s time to circle back and take a fresh look at the activities and services these departments know so well. After all, those services could be utilities’ biggest hope for the future.