Financial innovations are a key driver for transforming the traditional grid into a Smart Grid, on one that is capable of completing the vision of Transactive Energy.  As described in my October 7 article, innovations in finance that encourage investments in big ticket energy efficiency improvements have real potential to help consumers and utilities save money and reduce carbon footprints.  In that article, one municipal utility identified the biggest challenge to deployment of their innovative finance program as the will to succeed.  That is also the conclusion by Brad Copithorne, Financial Policy Director at the Environmental Defense Fund (EDF).  EDF has been very involved in promoting state-wide on-bill repayment (OBR) programs for the investor-owned utilities (IOUs) in California.  Brad summarized the “will to succeed” distinctions between the states of Hawaii and California in his blog.

OBR programs differ from on-bill finance (OBF) programs in two important regards – the funding for OBR comes from private sources of capital like your friendly neighborhood bank instead of the utility’s funds, and these funders compete for borrowers – just like home mortgage financing.  There are significant implications in these two distinctions.  First, the source of funds for OBR programs removes objections from consumer advocacy groups about ratepayer funds used to subsidize activities that favor homeowners at the expense of renters.  Second, private sources of capital are competing for market share in OBR programs, and will leverage their skills to create cost-effective, capital-efficient programs that are successfully marketed to a wide range of prospective borrowers.  These are skill sets the average utility lacks.

According to the California IOUs (Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric), OBR programs are unfair to ratepayers who are not homeowners.  But OBR programs are similar to Property Assessed Clean Energy (PACE) programs.  PACE* programs are public/private partnerships that effectively finance energy efficiency and renewable energy investments for commercial and residential real estate.  PACE loans are attached to the property tax bill.  By contrast, OBR loans are attached to the meter.

Making buildings more energy efficient, which typically consume 65% of the electricity load helps utilities avoid grid investments.  The aggregate benefits of energy-efficient building stock can be enjoyed by all ratepayers in the forms of reduced or avoided investment in more utility-based generation and reduced carbon emission.  EDF estimates that an OBR program in California could generate $5 billion of third-party investment per year, create 37,000 jobs and reduce annual CO2 emissions by upwards of 200 million metric tons over 12 years.

There are costs for an IOU to adopt an OBR program.  The IOU must ensure that their billing system can accommodate integration of the OBR line item as part of the bill.  Many utility billing systems may not be up to the task, because utilities traditionally underinvest in their information and communications technologies (ICT).  It’s possible that many IOUs have billing software systems that aren’t capable of flexibility to add a new line item to billing systems, or figure out proportional payments to transfer some receivables back to the OBR lenders.  That’s a big red flag that those utilities aren’t ready to adopt Time of Use tariffs that distinguish electricity pricing based on time as well as total kilowatthours.  But there’s hope for utilities.  Phone companies (and their billing system vendors) figured out billing by time of use as well as total minutes a long time ago.  You may recall a past when long distance calls made by wireline phones were cheaper after 9PM.  Phone companies marketed this program to avoid congestion on networks during peak times of use.  That was a new-fangled idea called Time of Use billing.

Utilities must transform their business models in order to survive.  Overcoming internal resistance to change is always a challenge for any organization, but it is absolutely critical that utilities master change management in order to survive.  Overcoming resistance to innovation – financial or otherwise – is another matter entirely.  Policy makers and public utility commissions can help utilities do that with legislation and regulation that forces change.  It may be the only way some of the Smart Grid transformations needed in the utility sector will occur.

*for more information about PACE, check out the PACEnow website.