TOPIC #4
Low-Income Energy Affordability
States try innovative rate designs and pilots to address energy affordability.
Energy Burden Challenges Low-Income Households
Ensuring affordability for low-income customers remains a top priority for utilities, regulators, and stakeholders. The rising costs associated with maintaining and transforming the grid are of a particular concern as low-income households are disproportionately impacted by rate increases.
Research from the American Council for an Energy-Efficient Economy (ACEEE) finds home energy burdens are “high” when home energy costs exceed 6% of household before-tax annual income and “severe” when the costs exceed 10%. In an analysis that includes transportation energy burden, ACEEE finds the energy burden experienced by low-income customers to be significantly higher than average households (see Figure 4.1).
In response to this challenge, states and utilities have embarked on rate design solutions aimed at mitigating the financial burdens of low-income households (see Figure 4.2). Some approaches being implemented include income-based discounts, tailored bill assistance, or income-graduated fixed charges. This section highlights approaches being undertaken in three states—Massachusetts, California, and New York—and identifies key questions that should be considered.
Figure 4.1: Average U.S. Combined Energy Burdens by Group (2022)
Source: ACEEE
Note: As of June 2024; does not include LIHEAP, medical-based discounts, late fee exemptions, "pay-later" programs, shutoff exemptions, or charitable assistance programs.
Source: NC Clean Energy Technology Center
KEY TAKEAWAYS
Home energy burden remains a significant challenge for low-income households who are disproportionally impacted by rate increases.
States are trying a variety of rate designs aimed at ensuring low-income customers have access to essential services.
Rate designs include a tiered discount rate program in Massachusetts, income-graduated fixed charges in California, and an energy affordability guarantee in New York.
Rate designs ensuring affordability for low-income customers must balance tradeoffs which include program precision, administrative feasibility, and consumer protection.
Home energy burden remains a significant challenge for low-income households who are disproportionally impacted by rate increases.
States are trying a variety of rate designs aimed at ensuring low-income customers have access to essential services.
Rate designs include a tiered discount rate program in Massachusetts, income-graduated fixed charges in California, and an energy affordability guarantee in New York.
Rate designs ensuring affordability for low-income customers must balance tradeoffs which include program precision, administrative feasibility, and consumer protection.
Massachusetts Approves Five-Tier Discount Rate
In September 2024, the Massachusetts Department of Public Utilities (DPU) approved a five-tier, low-income discount rate structure proposed by National Grid (see Figure 4.3). The tiered discount rate will replace a flat 32% discount currently available to households with incomes at or below 60% of the Massachusetts statewide median income.
The tiered discount rate responds to a DPU directive, issued in November 2021, that electric distribution companies should explore stratifying low-income discount rates to provide an equitable discount for customers, assist the most vulnerable customers, and mitigate the potential rate shock for customers that transition from low to moderate income.
National Grid acknowledges that the tiered rates are more complex, but the approach is designed to be more equitable while keeping the electric energy burden for eligible low-income customers at approximately 3.1%. The new rate structure must be implemented no later than June 2025.
In addition, the DPU approved a performance incentive mechanism tied to enrollment target of 4,650 new, qualifying, low-income customers each calendar year. National Grid may earn up to $500,000 per year for exceeding the target or incur a penalty up to $500,000 per year for missing the target.
The DPU also plans to further investigate and potentially adjust the tiered discount rate structure in an ongoing proceeding, considering factors such as target electric energy burden, appropriate tiering structures, and the impact of electrification.
Figure 4.3: Massachusetts Tiered Discount Rates by Household Income Level
Source: Massachusetts DPU
California Adopts Income-Graduated Fixed Charges
In June 2022, the California Legislature passed Assembly Bill 205 (AB 205) which allows the recovery of fixed costs on residential bills to shift from volumetric rates to a separate, fixed amount. In addition, the law requires that the total costs recovered may not increase, and the fixed charge must be income graduated.
In the ensuing rulemaking, stakeholders considered multiple implementation issues. Notable issues included defining fixed charges subject to income graduation, determining the appropriate number of income tiers (AB 205 required at least three tiers), defining eligible low-income ratepayers, and establishing a process to verify income while ensuring data privacy. Stakeholders also weighed how fixed charges may impact the adoption of energy efficiency and electrification measures.
In May 2024, the California Public Utilities Commission (CPUC) unanimously adopted the following fixed charges:
- Tier 1: Customers enrolled in the California Alternate Rates for Energy (CARE) low-income assistance program will pay a discounted flat rate of $6 per month.
- Tier 2: Customers enrolled in the Family Electric Rate Assistance Program (FERA), as well as those residing in deed-restricted affordable housing with incomes at or below 80% of the area median income, will qualify for a discounted flat rate of $12 per month. Area median income is defined at the county level by the California Department of Housing and Community Development.
- Tier 3: All remaining customers pay $24.15 per month. This rate was on the lower end of proposals submitted by stakeholders to the CPUC (see Figure 4.4).
In addition to fixed charges, the CPUC lowered volumetric rates by 5 to 7 cents per kilowatt-hour. Southern California Edison and San Diego Gas & Electric will implement the new rates in Q4 2025, while Pacific Gas & Electric will begin implementation in Q1 2026. In addition, the CPUC approved an aggregate total of up to $35.6 million for implementation costs.
Figure 4.4: Comparison of California Flat Electric Rate Proposals
Source: CPUC
New York Launches Energy Affordability Pilot Program
In August 2024, the New York State Public Service Commission approved the implementation of the Energy Affordability Guarantee (EAG) pilot. The program will provide approximately 1,000 households with “tailored bill assistance” to reduce electricity costs to no more than 6% of annual household income.
To be eligible for the program, customers must fully electrify their space and water heating through the EmPower+ program which provides no-cost and subsidized energy efficiency and clean energy upgrades for low- to moderate-income households. The EmPower+ program is administered by the New York State Energy Research and Development Authority (NYSERDA).
The EAG pilot program will be funded through a $50 million appropriation in the state budget. In addition, the EmPower+ program is leveraging home electrification and appliance rebates available through the Inflation Reduction Act.
Customers are expected to receive the energy guarantee for 15 years which is the estimated useful life of a heat pump. If a customer moves from a home participating in the program, the new occupant is eligible to apply for participation in the pilot.
Key Considerations in Designing Rate Solutions
As utilities explore rate design strategies to address affordability concerns, some questions to consider include:
- What rate designs will best meet energy affordability objectives (e.g., income-graduated charges, tiered discount rates, etc.)?
- How will rate designs that address energy affordability concerns interact with existing low-income offerings, such as Low-Income Home Energy Assistance Program (LIHEAP) or existing discount rates?
- How will bill discounts that address energy affordability concerns be recovered and from which customer classes?
- How will rate designs that address energy affordability concerns balance other rate design principles, such as fairness, simplicity, economic efficiency, and promotion of energy efficiency and clean technologies?
- What rate designs will help maximize enrollment among eligible customers?
Utilities, regulators, and stakeholders must carefully consider tradeoffs. In the end, ensuring equitable access to essential services while advancing broader energy policy objectives will require balancing program precision, administrative feasibility, and consumer protection.
IMPLICATIONS
Affordability remains a key concern for utilities, regulators, and stakeholders. This concern is particularly potent for low-income households which experience elevated energy burdens. Innovative rate designs can be deployed to ensure these households retain access to essential services. These programs can vary significantly, depending on jurisdiction, but must balance a host of tradeoffs.
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