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November 28, 2023
Beth Hansen and Jordan Randolph recently bought a home in their hometown of Orcas Island, Washington state. Unfortunately, their house came with high electricity bills, due to its use of inefficient electric baseboard equipment for heating. Fortunately, their utility, Orcas Power and Light Cooperative (OPALCO), a rural electric co-op serving the San Juan Islands, including Orcas Island, could help. To avoid high energy costs, the couple decided to install two heat pumps using the OPALCO-operated on-bill financing program known as Switch It Up!, which EESI helped launch in the spring of 2019. Beth and Jordan had heard rave reviews of the program from a family member and wanted to switch to more efficient heating and cooling equipment for their home.
“OPALCO made the Switch It Up! program extremely easy,” said Beth and Jordan. “We filled out a simple application, and within a week, we were approved. The cost-benefit between the loan and the money you save on electricity was a big motivator. The other was the fact that the hardest part about living in Washington is how terribly cold it gets. We both work remotely and need warm fingers to ensure we are typing efficiently every day, even in winter.”
Heat pumps transfer heat by using electricity and refrigerants, similar to refrigerators. In winter, heat pumps warm buildings by moving cold air from the inside to the cold outdoors; in summer, heat pumps cool buildings by moving indoor heat to the outside. Air-sourced heat pumps are up to 300 percent more efficient than their fossil fuel-powered counterparts. Switching to a heat pump from a fossil-fuel powered device reduces carbon emissions, improves indoor air quality, and benefits the environment overall.
Heat pumps can be used as part of a decarbonization strategy for buildings, especially in rural areas. Overall, buildings account for 40 percent of all national energy usage and about 30 percent of U.S. greenhouse gas emissions. There are more than 65 million households in the United States, and about 50 percent of them use propane, fuel oil, or inefficient electric baseboards for heating. Making buildings more energy efficient, including by switching to heat pumps, reduces energy costs and helps achieve carbon emission reduction goals. Heat pumps offer excellent opportunities for bill savings, reducing greenhouse gas emissions, and addressing climate change.
OPALCO’s Switch It Up! Program helps its members finance energy-efficient equipment, including heat pumps, over 10 years, with the devices being repaid as a line item on their monthly utility bills (this is known as tariff-based on-bill financing). Because the cost charge is assigned to the utility meter and not to the individual, it survives changes in ownership or tenancy. This also allows renters to participate in the program, increasing equity. To expand program access, OPALCO does not require participants to have a minimum credit score. Instead, OPALCO looks at whether or not participants’ monthly bills have been paid on time for the past 12 months and whether they are otherwise in good standing with the co-op.
Securing a contractor’s bid is the first step in applying for the program. Contractors are key to the Switch It Up! program's success as they act as both the installer and educator for a building’s new equipment. After OPALCO has reviewed and approved the member’s application, a contractor installs the heat pump or energy upgrade at the member’s premises.
“Some of the best advocates for our program are the contractors who install the projects,” Suzanne Olson, OPALCO’s communications manager, said. “OPALCO met with HVAC, plumbing, and solar contractors to help develop the specifications for the measures offered, and they contributed excellent ideas and feedback to make it work smoothly. Our contractors love us because the utility pays them directly when a project is complete—and the 'paperwork' cycle is simple and clear.”
By helping households and businesses replace fossil fuel-powered furnaces and water heaters with more efficient electric equipment, Switch It Up! increases affordability and reduces carbon emissions. The switch to more efficient equipment helps co-op households, particularly low- and moderate-income ones, save money on their utility bills while promoting a healthier environment. These monetary savings can help these households avoid difficult trade-offs between heat and necessities such as food.
Preparing a building’s electrical system to accommodate heat pumps also prepares it to better accommodate solar panels, battery storage devices, and electric-charging equipment, making those further investments in sustainability more accessible. And, moving to electric space conditioning and heat-pump water heaters also helps utilities manage energy demand, leading to further efficiencies and cost savings. Newer heat pumps and heat-pump water heaters offer a multitude of grid management attributes, namely load-shifting and load-shedding capabilities. Load shedding is achieved by turning water heaters and heat pumps off during peak demand times, leading to a reduction in energy usage. Energy load can be shifted to non-peak demand times instead. Ultimately, these actions flatten the load curve and make it more predictable, benefiting the grid, utilities like OPALCO, and customers.
“In building the Switch It Up! program, we wanted to make it easy for members to access and clearly show the benefits of electrification,” Olson said. “Our program is a tariff on members' bills—and we're very excited to have encouraged and financed 580 projects to date totaling about $9.5 million, with another 30 projects in various stages of the development process. This tool is doing a remarkable job of moving the needle on electrification of heating and energy efficiency upgrades for the housing stock in our rural-remote territory.”
OPALCO members can use Switch It Up! to finance up to $100,000 in energy efficiency measures and clean energy upgrades for their homes and businesses (e.g., attic insulation, air sealing, smart thermostats, fiber-to-the-home, on-site solar, community solar, EV charging stations, and battery storage devices). Funding from the U.S. Department of Agriculture’s (USDA’s) Rural Energy Savings Program (RESP) allowed OPALCO to expand its financing to new measures and raise the cost ceiling per member to encourage participation. In early 2022, OPALCO secured its third tranche of RESP funding, totaling $46 million in zero-interest capital for program capitalization.
The Switch It Up! program is part of OPALCO’s utility-wide initiative, "This Electric Life," to electrify buildings and transportation (including island ferries) powered by the cooperative. While most of the power OPALCO uses is sourced from clean hydropower, more than one-third of OPALCO members rely on propane or fuel oil for space-and-water heating. OPALCO provides power to a 20-island archipelago, and there are no bridges between the islands or the mainland. That means delivered fuels, such as propane or fuel oil, must be shipped in, increasing costs.
The Inflation Reduction Act (IRA) allocated about $9 billion in rebates to increase the adoption of heat pumps, heat-pump water heaters, and energy efficiency measures that decrease carbon emissions for households. The law’s Home Energy Rebates and Energy Efficient Home Improvement Tax Credit, administered by the U.S. Department of Energy, are conduits for those rebates, and can help decarbonize end-use appliances, for example by financing the switch from fossil fuel-powered furnaces to heat pumps.
States and territories oversee the Home Energy Rebates, which include two federal energy efficiency and electrification rebate programs: the Home Efficiency Rebates Program (IRA section 50121) and the Home Electrification and Appliance Rebates Program. To increase equity, both programs are income-based, meaning low-income households have increased rebate levels.
Through the Home Efficiency Rebates Program, families can claim rebates for eligible energy efficiency measures—like insulation, weatherization, and air sealing—that make the building envelope tighter, thereby reducing energy use for heating and cooling and lowering energy bills. These rebates are available for both single-family and multi-family buildings. Households with an income lower than 80 percent of the Area Median Income (AMI) can receive up to 80 percent of their total project costs, up to a maximum of $8,000 per household, if they meet certain conditions. Wealthier households can claim up to 50 percent of their project costs with a maximum limit of $4,000. Rebates are only available for projects expected to result in energy savings of 20 percent or more, and projects that are expected to cut energy use by 35 percent or more qualify for higher rebates (see the graphic below for details). To measure the effectiveness of a project, families may opt for a modeled or measured pathway. The modeled approach uses predicted energy savings before work is performed, whereas the measured pathway is based on verified energy savings after installation.
Households may also claim eligible product rebates via the $4.5 billion Home Electrification and Appliance Rebates Program. Low-income families (with incomes lower than 80 percent of AMI) can receive 100 percent of total project costs (up to $14,000), whereas moderate-income households (with incomes between 80 and 150 percent of AMI) can only claim up to 50 percent of total project costs, also for a maximum of $14,000.
Although the Home Efficiency Rebate Program and Home Electrification and Appliance Rebate Program are both part of the Homes Energy Rebate program, a household cannot claim both rebates for the same project. The Inflation Reduction Act allows either of these rebate programs to be paired with the Energy Efficient Home Improvement Tax Credit (25C in the Internal Revenue Code), provided the household has enough tax liability to take on the credit. The law also allows for “stacking” these rebates with utility rebates, Greenhouse Gas Reduction Fund (e.g., green bank) financing, and other types of innovative financing, such as Switch It Up!, to make energy upgrade projects more affordable.
TheEnergy Efficiency Home Improvement Tax Credit is for single-family homeowners installing eligible energy efficiency and electrification upgrades. These federal tax credits are available through 2032. Households living in single-family homes can receive a 30 percent tax credit for energy upgrades performed in their primary residence, with a limit of $3,200 annually. The tax credit is for improvements made in a primary residence and so cannot be claimed by landlords who do not live in the house where the improvements are being made. Additionally, the tax credit is nonrefundable and cannot be rolled over to the next tax year, which means that the person claiming the tax credit must have enough tax liability to benefit from it.
The maximum credit one can claim each year is:
While these federal rebates and tax credits are helpful, they do not cover all of a project’s costs. Therefore, financing remains critical to unlocking clean energy upgrades. This is especially true because rebates and tax credits are not accessible to all: some households lack the capital to pay for what rebates do not cover, and others do not pay enough in taxes to benefit from tax credits. Because on-bill financing programs, like Switch It Up!, require no money down, they can help low- and moderate-income households overcome the typically high upfront costs associated with these retrofits and afford energy upgrades that deliver energy savings.
By combining federal rebates or tax credits with an on-bill financing program like Switch It Up!, families—like Beth Hansen and Jordan Randolph—can better afford to replace their furnaces with heat pumps and save money.
Author: Miguel Yañez-Barnuevo
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