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Home My WebLink About09182024 PACAB Work Session Laydown - Phil Kaluza0 i% / Y"Acia At>J- � Electrifying Seward: A Declining Block Rate Incentive By Phil Kaluza Executive Summary This white paper proposes a Declining Block Rate (DBR) incentive to promote the adoption of heat pumps in Seward, Alaska. Heat pumps present an opportunity to significantly reduce CO2 emissions and heating costs while enhancing local utility revenues. This paper details the benefits, challenges, and proposed DBR structure, supported by historical rate studies and recent developments in rebate programs. Introduction Seward's coastal climate provides a favorable environment for cold climate heat pumps, which can efficiently replace heating oil for space heating. Despite their benefits, the high upfront, and operating cost of heat pumps has limited their adoption. To address this, we propose a DBR structure that leverages upcoming rebate programs to make heat pumps more financially attractive and accessible. Benefits of Heat Pumps Economic Benefits • Reduced Heating Costs: Heat pumps, at current electric rates offer minimal savings on heating costs, which can be further enhanced by the proposed DBR. • Utility Revenue Increase: Increased adoption of heat pumps will lead to higher utility revenues, resulting in benefits for all consumers. Environmental Impact • CO2 Emission Reduction: Heat pumps can reduce CO2 emissions by over 50% compared to heating oil. As renewable energy sources are integrated into the grid, this reduction will improve further. 1 • Climate Adaptability: Seward's moderate climate allows heat pumps to function effectively year-round, potentially displacing up to 100% of heating oil consumption in many cases. Challenges Installation Costs • High Upfront Expenses: Installing a heat pump costs between $5,000 and $15,000, a substantial investment for most households. • Rebate Programs: Two significant rebate programs scheduled for implementation early 2025, are expected to mitigate these costs: 1. 2022 Inflation Reduction Act: Provides up to $8,000 in rebates for low to moderate -income households and a 30% tax credit (up to $2,000) for higher -income households. 2. Accelerating Clean Energy Savings in Alaska's Coastal Communities Program (ACES) : A $38.6 million federal grant will help about 6100 households in southern and central Alaska, including Seward, install heat pumps. Offers rebates ranging from $4,000 to $8,500, depending on income levels. Market Dynamics • Electric Rate Increase: The January 2024 electric rate increase has diminished the financial advantage of heat pumps, resulting in a decline in installations and use. Historical Context and Previous Rate Studies Historical Rate Structures Prior to the energy crisis of the late 1970s, declining block rates were common. They reflected the decreasing cost of providing electricity as household consumption increased, due to fixed costs like distribution infrastructure remaining constant. Changes in Rate Structure The 1970s energy crisis led to the elimination of declining block rates to encourage conservation and manage revenue from higher consumption users. Modern utilities have generally adopted flat or increasing block rates to address these concerns, but a well -designed DBR for heat pumps could reintroduce a beneficial rate structure without encouraging wasteful consumption. (The Matanuska Electric Association has a modest existing declining block rate for residential users.) 2 Seward's Rate Study Recommendations The Seward Cost of Service/Rate Study, May 10, 2021, suggested investigating incentives or special rates for heat pumps and electric vehicles. This study recognized the potential benefits of such incentives. Proposed Declining Block Rate (DBR) Incentive Proposal Details • DBR Structure: A residential DBR for heat pumps is proposed. Households using more than 600 kWh per month would benefit from a reduced rate for electricity consumption above this benchmark. • Rate Reduction: Based on current electrical rates, a reduction of 8 cents per kWh for heat pump users is proposed, creating a financial incentive for adoption while maintaining a 9 cent margin to offset utility costs. Implementation • Incentive Design: The DBR aims to offer a reasonable payback period for homeowners, with a target of 5-7 years for middle -income households. The rate structure should be designed to ensure participation without negatively impacting non -heat pump users. • Eligibility: The DBR should be available to all new and existing heat pump households. Economic Analysis Cost and Savings • Heat Pump Efficiency: In Seward's climate, heat pumps require approximately 12 to 14 kWh of electricity to replace one gallon of heating oil. Efficiency varies by the type of heat pump, with smaller units typically being more efficient. (13 kWh used in this discussion) • Cost Comparison: Heating oil prices have fluctuated between $3 and $5 per gallon over the past decade. With electric rates at $0.29/kWh, (blended summer/winter rate) and heating fuel costs averaging around $4/gal, heat pumps currently offer modest savings. 3 Example Analysis • Current Annual Savings: A household saving 400 gallons of heating oil annually, the estimated net savings from a heat pump are $92 per year. • Proposed Annual Savings: With a declining block rate of $0.21/kWh the annual savings will increase to $508 per year for the same household. Larger and/or Tess efficient homes can displace more heating oil with a heat pump, resulting in increased annual savings. • Electric Utility Revenue: Using the same assumptions above, the utility will increase annual sales of 5200 kWh/yr to displace the 400 gallons of heating oil with a heat pump. Deducting a $0.12/kWh COPA, the utility retains a margin of $0.09/kWh, resulting in a net profit of $468 per year for every 400 gallons of oil displaced. Multiplied by the 15 year life of the heat pump, equals $7000 of net profit per heat pump installed over its useful life. Benefiting all ratepayers. Further Discussion Incentive vs. Rebates • Rebate Impact: Federal rebates and tax credits will support heat pump adoption, but the proposed DBR is expected to provide a more substantial long-term incentive, addressing ongoing operating costs and savings. Rate Structure Considerations • High Electric Users: Households with a heat pump exceeding 600 kWh/month will benefit from a lower rate for additional non heat pump consumption. This aligns with the traditional "cost causer = cost payer" principle and should have minimal effect on overall rates as larger homes will generally require more heat pump energy as well. • Low Electric Users: Households using Tess electricity than the 600 kWh per month may not benefit as much from the DBR. However, they will still gain substantially from eligible rebates and lower overall costs. An option for a lower threshold block rate for low-income households could be considered in the future as experience is gained. Implementation and Review • Annual Review: The DBR should be reviewed annually, with adjustments based on heating oil prices and electric rates as necessary. 4 Conclusion Implementing a simple Declining Block Rate incentive for heat pumps in Seward offers a strategic solution to encourage adoption, reduce CO2 emissions, lower heating costs, and increase utility revenues. By combining this incentive with existing and forthcoming rebate programs, Seward can maximize environmental benefits and support the local electric utility. The proposed DBR aligns with historical rate studies and addresses current challenges, providing a practical and beneficial approach to energy efficiency. This Declining Block Rate incentive should be evaluated for EV owners and include the other commercial rate classes in adopting heat pumps in the future. For further information or to discuss this proposal, please contact Phil Kaluza at pkaluza@gmail.com 5