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Home My WebLink About11202024 PACAB Work Session Laydown - Kaluza 2IPf Ill v PAcA6 Vs-KALu�A Further Discussion & Resources: Benefits of a Declining Block Rate vs. Alternative Rate Structures Overview and Simplicity • The declining block rate is a well -established structure in the electric utility industry, recognized for its simplicity and ease of administration. • This structure is straightforward to implement within existing billing systems, requiring no additional metering hardware. This reduces costs and encourages wider participation. • For both households and utilities, the rate is clear, predictable, and easy to understand, offering economic benefits to low- and moderate -income households. A declining block rate adheres to the "cost causer = cost payer" philosophy, making it a fair and transparent approach to billing. The recent Seward 2021 Electric Rate Study recommends developing a heat pump rate to promote adoption. The simplicity of implementing a declining block rate compared to more complex alternatives makes it attractive for utility billing systems, households, and administrators alike. Supporting Energy Efficiency Across Income Levels This rate structure incentivizes households with heat pumps to use energy efficiently. Its predictability benefits all households, especially low-income families, by allowing them to participate in energy -efficient heating programs. Combined with upcoming heat pump rebate programs, this structure can significantly boost participation in these multi -million -dollar, one-time incentive programs. By lowering the energy burden on low-income households, the declining block rate, paired with rebate programs, further incentivizes the installation of efficient heat pumps. Additionally, it is flexible enough to adjust with market fluctuations, such as changes in oil and electricity prices or available rebates. Ease of Participation and Administration Unlike income -restricted programs, this rate does not require income verification, avoiding barriers that might discourage low-income households from participating. This simplicity benefits both households and utilities by reducing administrative burdens. As a result, households across all economic backgrounds can take advantage of efficient heating incentives without additional requirements. Utility Economic Justification for Declining Block Rates for Heat Pumps The declining block rate is economically advantageous for utilities due to the nature of their cost structure. As fixed costs remain stable, the cost of providing additional kilowatt-hours (kWh) decreases, especially when there is no need for extra metering or complex billing systems. For heat pump users, the rate applies to electric usage above 600 kWh, a level based on average residential consumption in Seward. This threshold ensures utilities can recover fixed costs, while low- and moderate -income households, which generally use less electricity, benefit proportionately. As a result, heat pump users contribute to maintaining the electric grid's fixed costs and generate additional utility revenue, benefiting all ratepayers. The declining block rate allows utilities to gain from an untapped market without sacrificing profits. For example, Homer Electric Association provided Marathon Oil with a low rate to prevent self -generation, demonstrating the benefits of competitive rate adjustments. Rate Reduction and Return on Investment The incentive includes a proposed rate reduction of 6 cents per kWh below the current rate. This makes heat pump investments feasible for moderate -income households by ensuring a reasonable return on investment (ROI) or a payback period of under 5-7 years, driving strong participation. When combined with rebates and tax credits, current oil prices make this target achievable. For lower -income households, higher rebates reduce the upfront cost of heat pump installations, making reduced operating costs the primary incentive. The utility benefits, too, retaining an 8-cent per kWh margin for electricity sold above the 600 kWh threshold. This arrangement is beneficial for both households and the utility. Future adjustments could be tied to oil prices or utility revenue needs. A higher rate reduction would boost adoption, while a smaller reduction would moderate it. The 6 cent rate provides a balanced approach, encouraging adoption while ensuring cost savings for households. For long-term security, the City should commit, as much as possible, to maintaining favorable rates for at least 5-7 years, promoting installation and utilization alongside available rebate funding. Additional Benefits Heat pump energy demand is temperature -dependent, peaking during cold nights and mornings when internal heat sources are lower. Since Seward's peak demand typically occurs during mid -day, heat pumps operate in a way that complements the existing Toad. Heat pumps also have high load factors, running continuously during the heating season. When temperatures are extremely low, heat pump efficiency declines, leading owners to use backup heating sources (e.g., oil heat or wood stoves), which can reduce utility load during peak periods. New smart meters also allow utilities to manage heat pump loads effectively, helping larger facilities regulate loads and minimize utility costs. Because residential heat pump loads are spread across the distribution system, increased usage does not require significant infrastructure upgrades, making it feasible for utilities to accommodate this new demand. Increased heat pump usage also supports the utility by offsetting fixed costs, which benefits all ratepayers, regardless of their heat pump usage. Residential Heat Pump Economics in Seward The financial impact of heat pumps varies based on housing type, lifestyle, and other factors. For Seward, here are some representative examples: • Small Homes: Typically, a small, moderately insulated home with a single -head cold climate heat pump can displace around 400 gallons of heating oil, consuming approximately 4,800 kWh annually. With an installed cost of $4,500, these households see considerable savings. • Larger Homes: Larger homes with multi -head systems can displace 600 gallons of heating oil annually, using approximately 8,400 kWh, with an installation cost of $8,000. Heating oil prices have ranged between $3-$5 per gallon over the past decade, currently sitting near $3.50 per gallon. Proposed rebates (up to $8,000 for low-income households, and 50% up to $4,000 for moderate -income households) and tax credits make heat pump installations more affordable. Currently, heating with a heat pump costs roughly the same as heating with oil. However, with the proposed rate reduction, households could see payback periods of 4-7 years. This benefits all ratepayers, as additional electricity sales support the utility's margin above purchase costs, helping lower overall rates. Rate Structure Considerations • High -Electricity Users: Households with a heat pump using over 600 kWh per month will benefit from the lower rate for additional non -heat pump electricity use, maintaining fairness while covering higher heat pump energy needs. • Low -Electricity Users: Households below the 600 kWh threshold still benefit significantly from rebates and overall savings. A future adjustment could consider a lower threshold for low-income households, but initially, simplicity is recommended. Future Rate Adjustments Heating oil prices vary significantly. An alternative to a fixed declining rate could tie the rate to oil prices, similar to the way natural gas influences Chugach Electric's rates. Adjustments could maintain a stable economic benefit, ensuring positive ROI and stable utility profits. Low heating oil costs might temporarily reduce the financial benefits of a heat pump, leading some to revert to oil. Conversely, if oil prices rise, the rate reduction could adjust, ensuring households a steady return on investment. Annual adjustments to rates are proposed, allowing flexibility in response to energy costs, carbon taxes, or renewable energy integration. Encouraging heat pump installations in new homes is also crucial for long-term utility revenue, which can be accomplished with consistent incentives. Commercial and Other Applications Large commercial buildings may require additional metering to ensure equitable billing, which is cost-effective given the savings potential. Similarly, incentives for electric vehicles could be considered for future programs due to their grid and environmental benefits. For now, however, the focus remains on residential heat pump incentives, especially with new rebates expected in 2025. Conclusion The Heat Pump Declining Rate Incentive offers a viable and efficient approach to promoting energy -efficient heating, reducing costs, and benefiting households across income levels. By maintaining a simple, flexible, and economically justified rate structure, this approach benefits both utilities and customers. Future adjustments tied to oil prices or revenue needs can keep the incentive relevant, while expected 2025 rebates make this an ideal time to support widespread heat pump adoption. Resources: Advocates hope utility's winter heat pump rate discount becomes model for Massachusetts utilities I Eneray News Network More good news for heat pumps in Massachusetts, as regulators order National Grid to develop special rate Mini -Split Heat Pumps in Alaska: ANALYSIS OF UTILITY INCENTIVES https://docs.google.com/document/d/14OVk-spvCGTEvkaHE3oP7N6OUEFuKs2ui4z1 ZdEhOYY /preview?hqd=1 &tab=t.0#heading=h.vb8p01epu9vn