Newly Released Roadmap Charts Path for Affordable Heating in Michigan
Last week, the Institute for Energy Innovation (IEI) and Michigan Energy Innovation Business Council (Michigan EIBC) released a roadmap for achieving affordable heating for residential buildings in the state of Michigan. The report, titled, “Clean, Safe, Affordable: A Policy Roadmap for Efficient and All-Electric Homes in Michigan,” was prepared for Michigan’s Department of Environment, Great Lakes, and Energy (EGLE), and includes a number of goals, findings, and policy recommendations to enable an affordable building electrification transition in the Great Lakes State. Advanced Energy United was pleased to provide perspectives on several policy recommendations included, and commends IEI, Michigan EIBC, 5 Lakes Energy, and all those involved in development of the comprehensive and timely report. As Michigan policymakers consider future opportunities to lower costs on the gas and electric systems, this roadmap will be a key place to look.
At the outset, the roadmap acknowledges the 2022 MI Healthy Climate Plan, a state-led report that identified the buildings sector as a major sector for greenhouse gas emission reductions in achieving the state’s statutory carbon neutrality goal. As a crucial next step to the MI Healthy Climate Plan, the roadmap outlines necessary actions to achieve the state’s clean buildings goals while expanding energy affordability in the state.
Both Advanced Energy United, and Citizens Utility Board (CUB) of Michigan, have published previous reports on growing gas capital investments in Michigan and how that spending will lead to rising gas bills that disproportionately impact low income and vulnerable customers. Among many key policy recommendations, EIBC’s roadmap lays the foundation for programs and reforms that will lower unnecessary spending on the piped gas system and bring down the upfront and operating costs of efficient electric home technologies for Michiganders. Those include, but are not limited to:
Improving rate design for electrification to prevent overcharging of winter-peaking customers
In Michigan, the electric system sees its highest peaks on hot summer days and has excess capacity in the winter months. Heat pump customers that use more electricity in the winter, or off-peak, may actually be putting downward pressure on rates for all Michigan electricity consumers (i.e., spreading the fixed system infrastructure costs over more kilowatt-hours). Despite this, electric heating customers pay rates that are developed for average residential use based on summer peak demand, resulting in those customers paying utilities more for grid infrastructure relative to the cost to serve them than their non-electric heating neighbors. As outlined in the roadmap, tailored rates, such as and time-of-use (TOU) structures, align prices with actual costs to serve these customers (meeting traditional ratemaking cost-causation principles), improve affordability for all, and encourage broader adoption of efficient electrification technologies via lower operational costs.
The roadmap models an alternative tariff that incorporates a seasonal TOU delivery rate with a slightly lower price per kWh delivery charge in the winter for electric heating customers. In addition, the model incorporates an hourly TOU element for the energy, or supply, charge in the summer for peak and off-peak times. In concert, these rate elements provide a more accurate reflection of heat pump customer costs on the grid, all while balancing the right price signals to encourage demand flexibility, energy efficiency, and complimentary distributed energy resources. The modeling concludes that single family buildings switching from gas to a heat pump on the alternative tariff could save $164 per year with building envelope upgrades, and single family buildings switching from propane to a heat pump could save up to $1,759 per year with envelope upgrades.
A future of gas proceeding that sets requirements for gas planning
The roadmap further acknowledges the need to investigate the future of the piped gas system given market trends toward electrification and rising gas distribution spending. Critically, the report includes recommendations to initiate timely and concrete actions by the MPSC following the study, such as long-term gas infrastructure planning with Commission oversight, and other complimentary reforms noted below. As Michigan considers studying the future of affordable heat, it will also be critical to ensure the process does not stall concrete actions at the legislature and public service commission to limit overinvestment in gas pipelines.
A non-pipeline alternatives (NPAs) proceeding to expand practical, cost-effective alternatives to natural gas system spending
Beyond studying the future role of natural gas in the state, the roadmap highlights the need for an NPA proceeding to establish a process to consider lower cost alternatives to natural gas distribution system spending. It recommends analysis of alternatives be done prior to the Michigan Public Service Commission (MPSC) approving significant new pipeline costs. Several intervenors in Michigan’s most recent gas rate cases have similarly called for an NPA proceeding for the state, and Michigan utility consumers could serve to benefit on the order of millions of dollars over the next several years. For example, because of a similar NPA-analysis requirement in Colorado, Xcel is able to replace a $300 million pipeline project with one to serve customers with equivalent energy for half the cost.
Eliminating line extension allowance policies to align utility practices with market trends
In line with the recommendation to reevaluate traditional gas infrastructure investments, the roadmap calls for Michigan to eliminate or reform its gas line extension allowance policies. Consumers and DTE Energy currently offer subsidies that can cover up to the full cost of pipeline to connect a home to the gas system for the first time, calculated from the expected revenue and project cost. While these policies have historically rested on the assumption that sharing system expansion costs with existing customers will benefit all customers, given market trends toward electrification, and the current inflection point of declining demand on the gas system, customers who remain on the gas system may end up paying more than their fair share for new customer connections. This policy preserves customer choice while ensuring that other gas ratepayers are not on the hook for their neighbors’ energy decisions.
Progress toward gas and electric integrated system planning
The roadmap additionally recommends that following a future of gas study, the MPSC should establish a formal process for gas and electric utility coordination, including identification of data needs for secure and timely information sharing and shared planning frameworks. Current utility planning processes in Michigan occur in silos. However, given the rise in gas-to-electric fuel switching and increasing operational interdependencies and risks between the systems, integration between utility forecasts and procedural processes will be increasingly important to ensure the most cost-effective and reliable investments are being made across the two systems.
A clean heat standard to supply an increasing percentage of clean heating services to customers
The roadmap also recommends Michigan adopt a clean heat standard that requires gas utilities to deliver clean heating services, such as electrification, energy efficiency, and more. The roadmap highlights that it is more economical for utilities to proactively consider where clean heat investments would save customers the most money, especially when the investments can prevent expensive pipeline replacements of aging infrastructure.
Updating the energy code to require all-electric new construction for commercial buildings by 2030 and residential buildings by 2035
Research has shown that all-electric new construction for single and multifamily homes is more cost-effective than building mixed-fuel homes. To ensure more affordable upfront costs to new construction, and that new homes do not have to be retrofitted prior to the end of the useful life of fossil fueled equipment to meet emissions reduction goals, the roadmap recommends Michigan first adopt an all-electric larger multifamily energy code by 2030, and further, adopt an all-electric residential energy code by 2035.
Ending incentives for new gas appliances by 2033
In Michigan, the Energy Waste Reduction (EWR) plans require gas utilities to spend a majority of their budgets on heat load reductions, such as weatherization. However, gas utilities still provide incentives for new gas appliances when it is not clear that those appliances will deliver lower lifetime costs than electric appliances. The roadmap recommends the legislature end utility incentives for new natural gas appliances by 2033. It further recommends the legislature prohibit gas utilities from counting gas appliance installations toward their EWR minimums. This type of policy provides clear signals to HVAC suppliers that they can begin ramping up their heat pump operations in the state, allowing the market to grow with confidence. It also ensures that customer-funded EWR programs do not serve to extend the gas system.
Reducing barriers to geothermal and thermal energy network projects
The roadmap includes several recommendations related to geothermal (ground-source) heating and cooling and thermal energy networks (TENs). Some of those include ensuring municipalities, utilities, and third parties are able to own, operate, and sell networked geothermal service in Michigan; that the Michigan legislature should pass legislation that requires the MPSC to create a TEN working group to explore to explore future opportunities for TENs and geothermal systems in Michigan; and that the MPSC should require utilities to file TENs pilots that would lower costs for utility customers. Because of their ability to provide highly efficient heating well into sub-zero temperatures, geothermal technologies may be particularly ideal for a cold climate state, like Michigan to explore.
These recommendations are just a handful included in the roadmap. Others include the need for a virtual power plant program in Michigan to manage costs on the grid as consumers use more electricity, budget asks to expand funding for heat pumps, weatherization, and energy efficiency measures, complimentary rooftop and community solar provisions, and more. As Michigan utility costs rise on the gas and electric systems, the state already has a comprehensive guide to more affordable heating – the next step is putting it into action.