A New Business Model for Energy Efficiency

Midwest Energy invests in energy efficiency while reducing customers' net costs

A key component of Midwest's service is an energy audit of customers' homes to identify opportunities.

Utility Innovation

2009 INNOVATIONS REVIEW

Companies find that environmental sustainability helps reduce costs and gain advantages.

Americans waste billions of dollars on energy every year, even though investing in more efficient homes, offices and factories would generate savings that more than justify the upfront costs. The question is, why? If energy efficiency saves money and is good for the planet, how can people be persuaded to do more of it?

Midwest Energy, a customer-owned utility company based in Kansas, found an answer to this question: In 2007, Midwest launched a program called How$mart^SM to help its customers make their homes and small businesses more efficient and lower their electricity bills—often without having to spend their own money to do so.

Addressing barriers to efficiency program adoption

The goal, according to Michael Volker, the firm's Director of Regulatory and Energy Services, is to overcome traditional barriers to energy efficiency. Here is how Midwest does it:

Lack of knowledge about efficiency opportunities: Midwest performs free energy audits of their customers' homes and businesses to identify energy-saving opportunities.

High upfront capital expenditures which take a long time to pay back through energy savings: The utility pays the upfront cost of efficiency upgrades. Customers repay the utility through a monthly How$mart^SM charge on their energy bill, but repayment terms are structured so that monthly payments are less than monthly energy savings and customers see a net reduction in their bills. Also, the How$mart^SM investment is tied to each property's meter, so if a customer moves, the new occupant takes over repayment (while still seeing a net energy bill reduction). This means customers can be comfortable making long-term investments.

Differing incentives for tenants and landlords: The loans are available to renters, provided they get permission from landlords. The tenants can then save money on their monthly bills, while the landlords benefit from the improvement to their property.

The program appears to be working, albeit on a small scale. So far, about 140 projects (homes, apartments and small businesses) have been completed and another 275 are on the way. The average How$mart^SM customer has seen a net reduction of about $9 a month in his or her monthly bill—saving about $49 in costs while repaying the utility $40 for the home improvements. This represents an average 25% reduction in electricity and gas usage per home.

Financial and efficiency benefits for utilities

So what does Midwest Energy get out of this program? First and foremost, Volker says, the company is benefiting from a positive new relationship with its customers. The program has also created a new source of revenue. Through the financing plan, Midwest is earning a return on its investment.

The longer term benefits are equally attractive. By keeping energy demand during peak hours down, Midwest may avoid having to build an additional power plant down the road.

So far, Midwest has invested about $700,000 into the How$mart^SM program. The company estimates that it has reduced electricity consumption by about 300,000 kWh per year and gas consumption by 3,000 MMBtu per year.

Proper tariff design is key for such a program to work, Volker says, but he says the Midwest Energy model could be adopted by utility companies across the nation. In this interview, he explains how the program was developed.

Posted: 09-Apr-2009; Updated: 20-Apr-2009

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