PAYS for Energy Efficiency – Q&A

PAYS for Energy Efficiency

What benefits can a tariffed on-bill program provide customers?
  • Immediate net savings (20% of estimated savings immediately accrue to customers)
  • Value of 100% of savings accrue to customers once all utility costs have been recovered
  • More comfortable and healthier buildings
  • No upfront cost, no debt obligation, no new liens on property
  • Lower exposure to energy rate increases
What efficiency upgrades are typically eligible?

Any upgrades that improve the performance of the customer’s energy uses would be eligible.

Some utilities require that eligible measures must be affixed to the property.

This scope can be narrowed to energy efficiency and demand response upgrades only at first, and then broadened to include other smart grid solutions including on-site storage and distributed renewable energy.

Among those upgrades that are eligible, only those that are found to be cost-effective will qualify for investment based on the rules described in following Q&As:

What is the portion of the estimated savings from the utility’s upgrade investment that the member keeps?

The PAYS® system is designed to cap the cost recovery charge at 80% of estimated savings. This means that the customer will enjoy net savings that are at least one-quarter (1/4) of the cost recovery charge until cost recovery is complete, at which point the customer will receive 100% of the savings.

What benefits can a tariffed on-bill program provide to utilities?
  • Lower energy and demand costs of wholesale supply
  • Deferred investment in peak power
  • Address hot spots and service to areas constrained by delivery capacity
  • Reach under-served market segments, including renters and low-moderate-income households
  • Improved customer satisfaction
  • Low cost, market-based options to attain clean energy and carbon pollution targets
  • More productive local economy with less resource waste
Is there a maximum duration of charges based on the useful life for upgrades?

In the PAYS system, the maximum duration of the estimated period for cost recovery is typically 80% of the estimated useful life of the upgrades –- or the duration of a full parts & labor warranty, whichever is longer. For building efficiency upgrades, that period is typically around 12 years.

How should the cost-effectiveness of the upgrades through an opt-in tariff program be evaluated?

The cost-effectiveness of the upgrades should be evaluated by a site specific cost-effectiveness analysis. To determine which upgrades would meet the threshold for immediate net savings for customers, the analysis performed for each site includes (A) the cost of installing the upgrades, (B) less the utility’s rebates and/or incentive payments, (C) the utility’s cost of capital, and (D) estimated savings for customers based on current rates.

Does the opt-in tariff either (A) guarantee savings, or (B) guarantee the upgrades will continue to work throughout the cost recovery period?

The PAYS system does not guarantee a certain level of energy savings. The margin between savings estimates and tariffed charges (i.e. the 20% immediate net savings allocated to customers) assures customers they will save more than they pay. PAYS is designed to assure customers that the cost recovery charges will stop if the upgrades fail to perform or all costs are recovered, whichever comes first. If the upgrades do stop working at no fault of the customer, the utility will suspend charges, arrange for repair or replacement, and if necessary, the utility can extend the cost recovery period to take those additional costs into account.

Is the obligation for cost recovery for the utility’s investment tied to a specific customer or to the utility’s meter at the upgraded site?

Investments in efficiency upgrades made through a tariffed on-bill program are tied to the meter, not to the person holding the account. The utility recovers the costs for those upgrades with a fixed charge on the meter, regardless of who occupies the property. The terms of the tariff apply to service at that meter until the utility’s costs are recovered.

How are the interests of successor customers taken into account when a utility invests in energy efficiency upgrades at a site?

The utility only invests in upgrades that are cost effective, and the threshold for cost effectiveness includes a significant net savings requirement. That means the fixed charge for cost recovery will be less than the estimated savings on an annual basis. The fixed charge does not increase when rates increase, creating additional value for the upgrades. As a result, a successor customer will receive the benefits of an improved building and receive a lower bill than would otherwise be due for the energy services at that site.

After a utility finances efficiency upgrades at a site, what happens to the obligation for cost recovery when a new customer signs up for service at that meter?

The successor customer (whether renter or owner) will enjoy the net savings from the investment, and until cost recovery is complete, the customer will likewise be obligated to pay the fixed, on-bill charge, which is significantly less than the estimated annual savings. Due to the on-bill payments made by the prior customer(s) served by that meter, a successor customer will have fewer billing cycles remaining until cost recovery is complete, at which point they will enjoy 100% of the savings.

What happens during a prolonged vacancy?

The utility only bills for service when the meter is active. If a site is vacant, the meter may be shut off, in which case cost recovery will resume when a successor customer opens an account at that site. If the utility misses cost recovery due to inactivity at the meter, the utility can extend the cost recovery period to collect the missed payment cycles. If the cumulative period of inactivity extends beyond the continued functioning of the upgrade, the utility may choose to charge-off the investment as uncollectible.

Should customers who opt into the tariff for energy efficiency upgrades be eligible for the same rebates as other customers?

Yes. It is essential that customers who choose an opt-in tariff program be eligible for the same rebates that are available to customers through rate-based programs in order to avoid creating a reason for customers to not opt in to the tariff.

What is the average scale of investment in cost-effective energy efficiency upgrades through a tariffed, on-bill program?

The average scale of investment in cost-effective energy efficiency upgrades at a site depends on the type of site, weather zone, the energy use equipment in the building, the utility’s cost of capital, and the useful life of the upgrades being undertaken. For residential energy efficiency upgrades undertaken through on-bill programs in Kansas, Kentucky, and Arkansas, the average cost of all cost-effective energy efficiency upgrades at a site are in the range of $6,000-8,000.

Do the tariff terms still hold if a change in occupant behavior at an upgraded site causes energy usage to rise?

Yes. The tariff terms are not affected by a change in occupant behavior or occupancy. The upgrades eliminate energy waste and continue to reduce usage at the location compared to what would have been needed to serve the occupant’s end uses. The tariff does not preclude occupants from using any amount of energy for any purposes they choose, which is an important consumer protection.

Does the opt-in tariff generate benefits that flow to all ratepayers?

Yes, there are cross-subsidies from customers in the opt-in tariff program to non-participants. Two categories of benefits include avoided demand costs and deferred capital requirements.

  • Utility systems with weather-driven peak demand can reduce peak demand by investing in energy efficiency upgrades to weather-driven loads as part of their investments in whole building energy upgrades.  
  • Utility systems with distribution circuits or substations that are reaching load capacity can defer investment in expansion with deliberate focus on energy efficiency upgrades in areas served by those assets.

Non-participants pay only what is warranted for the benefits of the PAYS program, and PAYS does not produce “free riders” because customers pay for 100% of their cost for the most cost effective upgrades.

Has any utility using the PAYS system disconnected program participants for non-payment?

No. Even while possible, disconnection for non-payment is unlikely because the electric bill at that site is lower as a result of the investment in efficiency upgrades.

Would an opt-in tariff for energy efficiency upgrades include disconnection for non-payment of the program charge?

Yes. Once approved as a tariff, the PAYS charge will be covering costs for an essential utility service, subject to the same disconnection rules as a regular bill.
See: 04 NCAC 11 R12-11 (“Disconnection of Residential Customer’s Electric Service,” which refers simply to the bill and defines payments as “delivery of the amount due to a company.”

In the case of a renter, does the opt-in tariff require landlord approval?

Before the utility can upgrade a property, the owner must consent. In the same agreement, the owner agrees to disclose to successor renters or prospective buyers that the utility has made improvements that result in savings for the account holder at that site. The agreement provides the owner with language that can be added to a lease agreement, for example.

Is customer satisfaction data available from utilities with existing investment programs based on the PAYS system?

The How$mart program offered by Midwest Energy is the largest and longest-running residential tariffed on-bill program using the PAYS system. Midwest Energy has reported that 85% of its general membership gave the cooperative a high score for customer satisfaction, compared to 97% for participants in the How$mart® program. Similarly, the cooperative reported that 68% of its general membership gave the cooperative a high score for value compared to 96% for How$mart® participants.

Where can I find more information on PAYS for energy efficiency building upgrades?

Energy Efficiency Institute, Inc., the creator of PAYS, produced a Decision Tool for Utility Managers at the request of Roanoke Electric, which has posted that valuable resource online: