pwr_january-2025 - 16

LEGAL & REGULATORY
Importance of Rate Design
in Moving Customers
Toward Electrification
Mark James
ome heating is approaching an impasse-there is
great opportunity to decarbonize through heat pumps
for both heating and cooling, but rising electricity rates
might discourage consumers from getting on board. Electricity
costs in the U.S. have outpaced inflation in recent
years; average increases were 10% in 2022 and another 6%
in 2023. And, in 2023, utility commissions approved $9.7 billion
in net rate increases with an estimated additional $8.4
billion to come by the end of 2024.
This of course creates a challenge in asking homeowners
to turn to electric heating. That has utilities, power generators,
and others in the energy sector asking: How can
we incentivize making the switch in a way that makes it
" worth it " for the average home? Twenty-five percent of
households in the Northeast reported some form of energy
insecurity in 2020. Asking homeowners to increase their
electricity bills in a high-cost environment is an issue that
cannot be ignored.
The adoption of decarbonization technology specific
rates is not new-utilities have been offering time-of-use
rates for off-peak electric vehicle charging for many years.
The move into building decarbonization technologies is an
acknowledgment that widespread heat pump adoption will
be affected by capital and operating costs. Smart rate design
can help ratepayers realize the financial benefits of the
energy transition.
One example of an attempt at a solution lies within two
Massachusetts utilities that will begin offering lower electric
rates during the winter heating season for homes with heat
pumps. The average residential electricity rate in Massachusetts
is 25.36 cents per kilowatt hour. In nearby Connecticut,
it is 24.24 cents per kilowatt hour. Only California ratepayers
pay a higher rate in the continental U.S.
On the positive, the costs of installing heat pumps continue
to drop, because of mass manufacturing and incentives
from the federal government. For example, Inflation Reduction
Act tax credits for heat pumps start at $2,000 and rise
to $8,000 for income-qualified households. The rising cost
of electricity, however, could make operating a heat pump
more expensive.
For a possible solution, let's look at the state of Massachusetts
and its work to support electric home heating to reduce
greenhouse gas emissions and meet long-term goals.
This past summer, Massachusetts received $100 million as
part of a $450 million multi-state Climate Pollution Reduction
Grant from the Environmental Protection Agency to create
the New England Heat Pump Accelerator, with a goal of
reaching at least 65% coverage of heat pump costs by 2030.
Customers want to see a reduction of their overall energy
bills to validate their decision to switch fuel sources. But,
16
H
a negative operating cost gap, in which the cost of heating
goes down after switching from natural gas to electricity, is
critical to scaling up the deployment of heat pumps. The answer
may lie in rate design. Differentiated electric rates for
homes with heat pumps could create that negative operating
cost gap, increasing willingness to adopt the technology.
For example, the Massachusetts Department of Public
Utilities (DPU) approved residential rates with lower base
distribution kWh charges during the winter for 1.3 million
households served by energy companies Unitil and National
Grid, and that use heat pumps. The DPU in July approved
Unitil's heat pump seasonal rate after the utility proposed a
lower seasonal rate for customers with heat pumps.
In contrast, National Grid proposed a broader electrification
rate, available to all customers, a technology-neutral approach
that replaced the volumetric distribution charge with
a monthly fixed-base distribution charge. Several groups-
environmental activists, advocates for low-income households,
a solar industry group, the state energy department,
and the state attorney general-all filed comments objecting
to this approach and pushing for a heat pump-specific rate
like Unitil's.
In October 2024, the DPU rejected National Grid's proposal
and ordered it to adopt Unitil's method, finding that
the heat pump rate was a reasonable, cost-efficient solution
to mitigate potentially high bills. This, it said, better
aligns with the state's goals to support electrification and
energy efficiency. The regulators concluded that National
Grid's proposal did not meet the state's legal mandates to
consider the impact of rate design changes on greenhouse
gas emissions and energy efficiency, as opposed to Unitil's
approach, which removes a barrier to lower emissions and
greater efficiency.
Low-income customers in both utilities can be eligible
for the rate and still qualify for energy assistance programs,
such as existing low-income rate discounts. In this way,
Massachusetts law and policy support the adoption of heat
pump specific rates.
The DPU's decision is in line with the state's greenhouse
gas emissions goals, aiming to cut emissions by at least half
by 2030, with net-zero emissions by 2050. A 2022 plan from
the state, the Massachusetts Clean Energy and Climate Plan,
even sets a 28% reduction target for emissions from heating
commercial and residential buildings by 2025, and a 47%
reduction by 2030. It may take creativity and inter-agency
cooperation, but Massachusetts has set the tone, showing
a way to engage customers, meet bill payers' needs, and
forge ahead in environmental protection. ■
-Mark James is interim director for the
Institute for Energy and the Environment
at the Vermont Law and Graduate School.
www.powermag.com
POWER| January 2025
http://www.powermag.com
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