Progressive Rate Reform: A Critical Tool for a Just Transition for Homes and Buildings Off Of Fossil Fuels

As the clean energy transition gains momentum, creating policies to ensure access to affordable electricity will be key to ensuring that no one is left behind and to building a more equitable, and sustainable energy infrastructure. Sierra Club is working with publicly owned utilities and utility commissions across the country to make significant changes to how customers are billed (often referred to as “rate design”) in order to ensure that everyone has access to clean, affordable energy.

Progressive rate design aims to scale the cost of energy based on the income level of the customer, which means lower-income customers pay less for power and high-income customers more. This is not just good energy policy; it can impact all aspects of ratepayers’ lives. As energy costs take up more of a household’s income, working families are forced to choose between paying electricity bills and paying rent, buying food, or accessing health care. Lower utility rates can therefore help to solve one piece of the housing affordability crisis across the US. According to a study by the American Council for an Energy-Efficient Economy, 25% of all US households experience high energy burden, paying over 6% of their income on utility bills. These impacts are not borne equally: Black, Indigenous, and People of Color households experience disproportionate energy burden. 

Progressive ratemaking and robust energy assistance programs can alleviate existing energy burden, while also ensuring that historically disadvantaged communities see reductions in future energy costs as homes and housing transition from polluting fracked gas to renewable electricity.

Low Income Protections

One of the most common approaches to rate reform, utilities have long offered programs designed to help low income households deal with high energy bills. While these programs are useful in reducing energy burden, they often suffer from funding shortages and low enrollment, and are increasingly critiqued as band-aid solutions to broader issues with contemporary rate design. That said, these programs offer critical stop gaps to ensure that households aren’t falling through the cracks as organizations work on broader rate reform.

  • Low Income Bill Discounts:
    Many utilities already have adopted bill assistance programs to offer a set amount of financial relief to low income ratepayers, which often takes the form of a static monthly bill credit. While these programs are better than nothing, they often fall short in addressing energy burden because they only offer a one-size-fits-all approach – whereas energy burden can vary dramatically from one household to another.
     
  • Percent of Income Payment Programs (PIPPs):
    In response to the potential shortcomings from one-size-fits-all bill discounts, another model of low income bill assistance is becoming increasingly popular - percentage of income payment programs. A PIPP caps energy bills for qualifying households at a certain set percentage of their income (usually 6%), allowing a utility to provide tailored assistance to low-income households, ensuring that no one experiences an excessive energy burden. PIPPs have been shown to be effective at addressing issues of affordability, and are currently in place in ten states, with some states, including Colorado and New Jersey, automatically enrolling households in PIPPs when they apply and qualify for the Low-Income Home Energy Assistance Program (LIHEAP). Nevada’s Energy Assistance Program, one of the most ambitious PIPPs currently in place, aims to cap electric rates for all low-income households at the level of the statewide median energy burden (about 3%).

    While PIPPS don’t address wealthy households not paying their fair share, they can be very effective at managing energy burdens in the short term, as the economics of gas and electric consumption transition. For example, Xcel Energy Colorado received approval to increase PIPP enrollment through its Clean Heat Plan programs, in order to meet statutory requirements that Clean Heat Plans include strategies to  mitigate their impacts on low-income customers’ rates.
     
  • Ending Utility Shut Offs:
    Everyone deserves access to energy, yet millions of homes across the United States have their power shut off every year because of their inability to pay their utility bills. These utility shut offs create significant risks for vulnerable communities, especially as the climate crisis progresses and extreme weather heat and cold weather events become more common. Thankfully, some states are taking precautionary measures to protect ratepayers from these impacts by limiting shutoffs in certain circumstances. For example, the State of Oregon has legislation that prohibits the shut off of utilities to customers during severe weather and wildfires. Activists in Washington had success pushing the state to establish a moratorium on energy shut offs in response to the COVID-19 pandemic, and are continuing to advocate for longer term restrictions on all shut offs moving forward. While these policies do not address inequities in our current rate structure, they serve as a critical backstop to ensuring that no one falls through the cracks and loses access to energy in their homes. 

More Comprehensive Rate Reform 

Comprehensive rate reform tries to address the underlying inequities of the energy system by restructuring how customers pay for energy, rather than simply providing low income customers with a discount on their monthly bills. While no option in-and-of-itself is likely to fully address inequities in electric billing, some options are gaining traction, including an income-graduated fixed charge, “boutique” rates, time-of-use ratemaking, and ending utility shut offs.

  • Income Graduated Fixed Charge Rates:
    One approach being explored in California is the use of Income Graduated Fixed Charge (IGFC) rates, which establish tiers for the fixed charges that customers pay for their electricity service. This is the portion of your bill that goes towards the "fixed" costs of the energy system, such as maintaining the grid. Under California’s approach, the fixed portion of a customer’s electricity bill varies based on income, but the “volumetric” or “usage” rate (i.e., cost per kilowatt hour ($/kWh)) is the same for all customers. Whereas, traditionally, all residential customers have paid the same fixed charge, California recently adopted an income-based system where the lower tiers pay a $6 and $12 fixed charge respectively. All other customers fall in the highest tier of $24 per month. So while the usage rate itself is the same for all customers, lower-income customers’ bills start from the lower basic $6 or $12 fee. Such a program could go even further, offering the lowest income customers a $0 fixed charge, creating more tiers, and gradually increasing the higher maximum fixed charge for the wealthiest customer, thereby mitigating energy burden by requiring wealthy households to pay more while offering discounts to low and middle income families. Income graduated fixed charges can also be combined with boutique rate approaches by exempting customers who use heat pumps from the fixed charge.
     
  • Boutique Rates:
    Another approach to rate reform is implementing “boutique” rates, meaning that customers taking certain actions (like installing an electric heat pump or adding an EV charger) may qualify for a lower electric usage rate. For example, in California, there are special rates for customers who electrify their homes, because the state has adopted electrification as a key climate strategy. These rates, like the SDG&E E-ELEC rate, combine fixed charges and time-of-use ratemaking to incentivize both electrification and optimal electricity usage to minimize grid costs. A fixed charge enables lower volumetric rates, which rewards the higher electric loads associated with electric EVs, heat pumps, and heat pump water heaters, while stronger time-of-use incentives enable participants to save even more on their bills by utilizing their electric technology to take advantage of lower rates that reflect lower grid costs during off-peak times, such as at night or in the middle of the day when there is abundant solar.

    Other boutique rates have the potential to significantly incentivize heat pump adoption by offering a discounted winter heating rate for those using electric heat pumps. For example, in Massachusetts, a winter heating rate rewards the efficiency and lower grid stress of electric heat pumps with discounted rates. This approach provides economic relief during months with the highest energy bills and creates a clear incentive for homes to transition to heat pumps to reduce emissions and energy usage. Similarly, in Colorado, the legislature is requiring utilities  to propose to their Commission a winter heating rate for electric heat pump adopters. In Summer 2024, Sierra Club and Western Resource Advocates intervened in Black Hills Energy’s rate case to propose a heat pump rate in line with this statutory directive.
     
  • Time-of-Use Rates:
    Time-of-Use rate design aims to incentivize customers to shift their energy use (load or demand) to times when energy prices are lowest by requiring customers to pay close to the real cost of energy. For example, in the middle of the day, when solar is at its peak, energy prices are low because solar is cheap to produce. Conversely, in the evening hours when solar production is winding down but energy use is high due to people coming home from work, cooking dinner, and turning on lights, energy prices are high. Time-of-use pricing, then, often takes the form of tiered rates that increase during times of peak demand on the energy grid (often 5-9pm on weekdays) and decrease during low demand periods (in the middle of the work day or the middle of the night, for example). These policies aim to incentivize smart energy use by reducing peak demand on the grid, thus requiring less generating resources to meet peak periods. Without key protections for residential users, time of use rates can come with unintended consequences, especially for low income households, by increasing costs when some working families might have no other choice but to consume energy. There are options, however, to help address this challenge, for instance by capping a low-income customer’s total bill and utility incentive programs to adopt “smart” appliances that can automatically shift their usage to “non-peak” periods. Because heat pumps and heat pump water heaters present great opportunities for load-shifting, boutique electrification rates often incorporate or pair well with time-of-use pricing.
     
  • Dynamic Pricing
    Similar to time-of-use pricing, dynamic pricing aims to incentivize customers to shift when they consume energy to the lowest cost periods. Whereas time-of-use pricing is typically implemented in large time blocks (e.g., peak period from 5-9pm), dynamic pricing changes throughout the day in response to energy prices in real time. Dynamic pricing is not yet implemented in any state, but states like California are seriously investigating how to implement this rate form option. Importantly, just as with time-of-use pricing, dynamic pricing has the potential to harm low-income customers who cannot easily shift their usage. The rollout of “smart” appliances capable of managing dynamic pricing automatically is critical for dynamic pricing to be successful on the residential level.

Conclusion

While there is no agreed upon, perfect approach to rate reform, it is becoming increasingly clear that reform is needed desperately. That is why Sierra Club’s Building Electrification Campaign is working alongside partners across the country to advocate for community led proposals to ensure that everyone has access to clean, affordable energy, while we simultaneously push for policy to transition homes and buildings off of polluting fossil fuels. Energy justice, economic justice and climate justice are intrinsically intertwined, and we cannot succeed in reducing emissions without simultaneously working to reduce costs for low income families.