In May, Massachusetts Governor Healey introduced The Energy Affordability, Independence, and Innovation Act (“the Act”). The Act intends to make Massachusetts more energy independent and stimulate innovation through several measures, including expanding and diversifying energy supplies, authorizing new rate reduction bonds to finance decarbonization, enabling gas utilities to own thermal energy networks, enacting consumer protections for competitive energy suppliers, and reforming Mass Save to drive both energy efficiency and electrification.

Through the Act Massachusetts would maintain nation-leading commitments to efficiency, electrification, and greenhouse gas reduction while providing greater flexibility for program financing, implementation, and utility business models. But with the potential for such innovations, there is also uncertainty and the need to ensure that new measures serve their purpose of protecting ratepayers by saving energy and money. In this blog, we give an overview of some of the key policies the Act proposes related to energy efficiency and their potential implications.  

Reducing Monthly Efficiency Costs with New Bond Options
Following Governor Healey’s provision of a $50 bill credit to all Massachusetts ratepayers, totaling $125 million in savings, and the PUC’s decision to create the first-in-the-nation moderate-income discount rates, the Act looks to prioritize affordability through many levers. One of these levers is how they finance energy efficiency. Currently, Mass Save costs are recovered through an energy efficiency line item on bills and collected through a volumetric charge, which is the variable portion of customers’ energy rates each month. The near-term impact of energy efficiency costs on bills varies with a customer’s usage and can therefore fluctuate considerably by month. The Act looks to change how this charge is collected and proposes a new mechanism to finance energy efficiency and other programs to reduce monthly bill impacts.

Two people working in front of laptops, profile

The Act proposes to allow utilities to issue rate reduction bonds, commonly referred to as securitization, to recover costs over extended timeframes and at a lower cost of capital than traditional methods of financing energy efficiency programs. This method of financing can result in a reduction of the financial burden on consumers in two ways. First, it would allow large costs to be spread over time. Second, it would lower the cost of capital that utilities receive on investments because bonds provide a lower interest rate than other forms of financing. The bonds could be used to replace all or a portion of the Mass Save charge on customers’ bills and to mitigate rate impacts from rapid electric infrastructure build-out and potential early retirement of the gas system. Among the proposed provisions in the Act, the rate reduction bonds would provide the largest source of savings to consumers according to recent analysis from Sustainable Energy Advantage and Synapse Energy Economics.  

Securitizing energy efficiency and building decarbonization costs would allow more investment in the near term, when it is needed, and lower bill impacts of these costs in the near-term. This is especially important as investments in efficiency and electrification can save all ratepayers money and reduce emissions, in the long term, as electrifying homes will avoid unneeded investment in the gas system, and proper weatherization will minimize the electric infrastructure upgrades required. Yet these programs require front-end investment, which could exacerbate already rising bills in the near term. Enabling utilities to spread out these costs can lower the impact on rates and enable the benefits to accrue to the grid and residents.  

Utility worker in cherry picker

Several states, including Massachusetts, used securitization in the 1990s during utility restructuring, which allowed utilities to spread out the cost of stranded assets from selling their generating facilities. States have also used securitization to recover other large expenses such as coal plant early retirement or pollution control measures, and investments in storm recovery. Securitization would be an innovative approach for energy efficiency program costs, but the playbook would need to be written.  

If utilities and regulators pursued this option as a financing strategy, appropriate guardrails would be needed to protect the interests of customers. Some considerations already exist in the Act, as it would limit rate reduction bonds to 30-year terms or less and require that bonds not be issued after 2036 without further enabling legislation. Additional safeguards should ensure that regulators oversee a transparent review of proposals put forth by utilities. Further, that the process ensures that investments continue to be the most efficient use of ratepayer dollars and that program budgets stay reasonable and focused on cost-effective investments. This analysis must demonstrate that securitization is in the best interest of customers as compared to alternatives, as the costs of multiple, multi-year program cycles stacked on top of one another could raise costs over the long term. A more detailed explainer on the history and mechanism of securitization for utilities can be found in this report from National Regulatory Research Institute. 

Transforming Mass Save to Energy Efficiency Plus Building Decarbonization 
The Act would also build on the existing achievements Massachusetts has made to energy affordability through the Mass Save energy efficiency program. Since 2013, Mass Save has provided $31 billion in benefits, returning $3.51 in benefits on every dollar spent, and increasingly focusing on programs that alleviate the energy burdens of the most vulnerable residents. The Act would codify the reforms to Mass Save from the 2025 - 2027 plan, including the state-level aggregation or pooling of program funds so that they can be distributed across utility territories and the removal of public subsidies for gas equipment. Additional reforms to Mass Save are outlined below:

  • Moving all Efficiency Programs under Electric Utilities to Lower Costs: Under the Act, all Mass Save programs would be administered statewide by the electric utilities with pooled funding across customer classes and service territories. Gas utilities would no longer administer efficiency programs. They would still collect funds from their ratepayers that would contribute to electric building decarbonization and energy efficiency programs. This proposal would lower program administrative costs by streamlining the number of program administrators.
  • Investing in Low-Income Efficiency Programs: The Act would increase the minimum spending on low-income residents from 10 percent to 20 percent for electric programs, matching that of existing gas programs. The Act would further strengthen income-eligible programs by codifying the centralization of Mass Save funds at the state level, enabling better prioritization and targeting of specific geographic areas. This is especially important for income-eligible programs where the utilities with the highest proportion of customers in need are also collecting the least funding.  
  • Financing Equipment with Inclusive Utility Investment: The Act would direct utilities to develop inclusive utility investment (IUI), allowing customers to finance energy efficiency projects through a tariff on their electric bill. This financing mechanism is intended to decrease the level of ratepayer incentives to promote energy efficiency and electrification, while still providing customer-side offerings at low or no upfront cost. IUI or On-bill tariffs are also a unique financing mechanism that can enable easier access to financing than traditional loans. Tariffs attach to the meter so that if a customer moves, the payment does not follow them while the benefits stay with the home. This can provide participants with efficiency upgrades to save on their bills, while saving all ratepayers money through avoiding infrastructure spending and reducing the amount of program funding through bills. As with other financing programs, customer protections will be critical to ensure clear communication and cost protection for consumers. 
     

Other Innovative Policies
In addition to looking at innovations in energy efficiency programs, the Act would provide new alternatives to investments that enable gas utilities to own thermal energy networks and provide plans for investment in virtual power plants.

Enabling Utility Ownership of Thermal Energy Networks
Gas companies would be authorized to distribute, sell, and generate utility-scale non-emitting thermal energy, including both thermal energy networks (“TENs”) and deep geothermal wells. This follows the TEN pilot in Framingham, and experience elsewhere in the Northeast such as proposed pilots in New York. TENs can increase the efficiency of heat pumps beyond that of traditional geothermal systems by allowing the sharing of energy between buildings, so that the cooling needs of one building can offset the heating needs of another and vice versa. They also give gas utilities and their workforce a clean energy alternative to gas pipeline construction by laying pipes between buildings. However, as in the case of the cancelled pilot in Lowell, project economics are heavily dependent on geology, customer density, and variation in building energy use.

two heat pump units over two windows

TENs would also leverage the economies of scale that the utilities have while providing jobs to existing gas utility employees and off-ramp from costly continued investment in the gas system. By allowing gas utilities to invest in thermal energy networks, neighborhoods may benefit from community-scale electrification projects and enjoy lower energy bills than would be the case if individually electrifying each building on its own. In addition to neighborhood and community-scale networks, the Act would allow gas companies to build, own, and operate single-customer TENs in their service territories. The Act would also require non-utility TENs crossing a public right-of-way or utilizing public land or buildings to match the pay and benefits of utility company employees in that service territory.  

Enhanced Utility Planning Requirements
The Act would require gas and electric utilities to better align utility planning with state affordability and climate goals. Electric utilities would be required to include a load management and virtual power plant (VPP) plan within their grid modernization plans.  Gas utilities would be required to create transition plans accounting for projected workforce attrition every two years, as well as a long-term plan that lasts until the company reaches net zero or retires all its pipelines. These requirements guarantee that utilities are planning right-sized infrastructure investments for the future and ensure that utilities are pursuing least-cost resources and realistic projections of future system use. This will save ratepayers money in the long-term, especially as electric grid usage increases and gas system usage decreases. 

What Next?
The Energy Affordability, Independence, and Innovation Act proposes large and innovative reforms, not just to energy efficiency, but also all aspects of the utility and energy system in Massachusetts. The Act has great potential to provide near-term energy affordability while simultaneously making investments in efficiency, electrification, and electric infrastructure to provide long-term cost savings to ratepayers and to help Massachusetts meet its climate goals. Together, these proposed policies would give regulators, program administrators, and utilities powerful tools to pursue energy efficiency and decarbonization for residents and businesses. Their results will depend on how well they are implemented in practice. NEEP looks forward to tracking this legislation as it advances.

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