Climate and energy

Midwest Energy is a rural electric cooperative based in Hays, Kansas. It serves 48,000 electric and 42,000 natural gas customers in central and western Kansas.

Midwest is a particularly progressive rural electric co-op. It serves a part of Kansas that is suffering high rates of rural depopulation – but in a situation where many businesses suffer, Midwest has figured out how to adapt and thrive.

Midwest has invested in renewables. Currently, it serves 49 megawatts (MW) of its load through wind energy purchased from the Smoky Hills Wind Farm, an amount that represents 16% of the co-op’s peak demand.

Economically, Midwest is also an “independent borrower” – meaning, it freed itself from the USDA’s Rural Utilities Service (RUS) borrowing system, and now finances its operations through private equity.

Midwest has also developed an award-winning energy efficiency program – How$martSM, a pay-as-you-save® (PAYS®) financing model that helps customers make cost-effective energy efficiency improvements to their home. The program has received compliments from the Kansas Corporation Commission, as well as earning the Governor’s Award for Energy Efficiency.

Michael Volker, Midwest’s Director of Regulatory and Energy Services, working with Midwest Vice President Pat Parke, developed How$mart(SM). Recently, Volker sat down with CEP’s Maril Hazlett to explain a bit more about the program.

(For a .pdf of this CEP Conversation, click here.)

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Maril Hazlett, CEP (MH): Tell me a little bit about how How$mart got started – where did the idea first come from?

Michael Volker, Midwest Energy (MV): Well — in the beginning…

MH: So energy efficiency is part of Genesis, huh?

MV: How$mart got started… well, three things. I happened to be on the Kansas Energy Council, when they were doing an inventory of energy efficiency programs. Also around that time, natural gas prices were spiking.

There is nothing a utility can do to change fuel prices – all we can do is to teach customers to conserve. So, what kind of energy efficiency programs improve or teach energy conservation? We looked at different programs and it stimulated our brain cells.

Now, no utility in Kansas had done a PAYS® program before, or at least not voluntarily. And no one has ever done it like we’re doing it now.

The last thing was that the Hays City Council was receiving a windfall from franchise fees – they charge Midwest a percent of revenue. They wanted to give that money back to the community, to subsidize low-income individuals, and so they asked us for help.

The City Council’s one requirement, before they would give that money to any individual, was an energy audit from Midwest Energy. They’ve long known about our energy auditing. In fact, they require that new homes have an audit from Midwest Energy before they’ll offer a certificate of occupancy.

MH: Midwest has been doing energy audits for a while?

MV: Since the 1980s. I think we have the longest continuously running energy audit program in the state, compared to other utilities.

MH: Sounds like a great idea.

MV: It was a great idea… but - the first winter, we would do the audit for the customer, and the customer would get the payment. But then we’d come back a year later for the same customer asking for the same thing.

No changes, no improvements. We’d do an audit, and we’d see holes in windows, holes in floors, unsealed, no insulation, equipment that was downright dangerous.

Unless you can fix the building envelope, the shell, energy efficiency is all but impossible to achieve. The most efficient HVAC system in the world isn’t going to matter if your house is uninsulated and leaking like crazy.

Not a lot of people can afford to plug the leaks, let alone put in a new HVAC system. It was frustrating. How do you help these people? How do we get past this barrier? They were living paycheck to paycheck – and/ or, they were renting. They couldn’t make the improvements themselves because it wasn’t their property, it was the landlord’s.

We were doing energy audits and yet, nothing was happening, nothing was changing. Our customers weren’t benefitting. We wanted to make something happen. So we considered the PAYS® idea.

MH: PAYS®. Pay As You Save®. Explain the basic principle to me.

MV: The way Midwest Energy interprets that principle is that the customer’s payment for energy efficiency improvements should never exceed their savings. That’s the fundamental core of How$mart.

MH: How does the PAYS® concept work for How$mart?

MV: Basically, Midwest uses the How$mart program to finance energy efficiency improvements for homes by allowing customers to pay off the improvements on their utility bill. In effect, we act like a bank. The amount that we can put on the bill for a How$mart charge can be no more than 90% of the estimated savings. We add that 10% buffer to guarantee the customer some savings.

MH: How do you decide what kind of energy improvements Midwest will pay for?

MV: It all starts with the energy audit. Actually, it starts with the customer. We’ve also targeted a few customers based on age of houses, etc.

The program is in its first year, and we haven’t marketed it at all, it’s just snowballed on us. Contractors know about the program, and they tell their customers to talk to us. I think there’s a lot of pent-up demand right now – when that eases down a bit, then we can market the program. Our goal is 100 customers per year. We have 51 houses done so far.

MH: For customers in the How$mart program, what’s the first step?

MV: When a customer comes to us, we ask some questions to evaluate their potential. Then we do a screening and take a look at their bills. We want to see what their energy consumption has been, what their bills look like to determine if this customer can make some meaningful improvements.

If the answer is yes, then we set up a time for one of our certified energy raters to go out and do an energy audit. They do a blower door test, furnace checks, combustion checks, the whole bit. Then they input their findings into their building science software, and they estimate how the energy use of the house would change if X equipment were changed, if Y level of insulation were added, etc. How would those improvements reduce the air leakage, and how much would that change in terms of saving energy?

Then we go a step further. We take that data and calibrate back the actual historical usage, the real data. Modeling software tends to overestimate the usage that actually occurs in a house. We are more careful, because we don’t want to over-estimate the customer’s savings.

MH: Because you don’t want to create a payment that is more than the actual savings.

MV: Exactly. And then we take all this data and create a conservation plan – the expenses of all the possible energy efficiency improvements and their actual dollar savings. This helps us prioritize the improvements.

It’s essentially a discounted cash flow. You look at how much money are you saving versus how much you have to invest and at what interest rate, to have a payback in no more than 15 years.

Then we provide the conservation plan to the homeowner. It gives them different energy efficiency options, how much they will cost, how much they will save, and which ones we will help them finance. We lend money based on the amount of energy savings.

MH: At that point, do you have to do some education?

MV: (Laughs.) At that point, it’s really up to the homeowner to make some choices. All the improvements might cost $5,500, according to our estimate – but the savings only justify $3,500. They can pay that difference if they want to – they can buy it down. Buy down is allowed.

So the homeowner makes the decision.

MH: What are some of the typical improvements?

MV: In almost every instance, either a heating system or a cooling system is involved. In more than half of the projects, there has been something done to the thermal shell. In many of those, it’s been a comprehensive improvement on the thermal shell, like insulation, caulking and sealing, or ductwork.

I don’t know that you necessarily call ductwork thermal shell, but it’s…

MH: Well, you lose so much – you don’t want to drop the heat in the basement.

MV: Or in the attic. You can see the problems from some of the pictures.

MH: What about windows?

MV: Argh. Everybody wants windows. We might finance some for windows, but usually not much. Windows are expensive, and new ones often don’t pay for themselves, or save that much energy – and How$mart only pays toward energy savings. Fix up your old windows… or, hey, put in a well-insulated wall — that’s a lot more energy efficient than a window.

(MH starts laughing.)

MV: What? Walls are more efficient than windows.

MH: Nothing. I just never thought of it like that. Okay, who does all this work?

MV: The homeowner chooses a contractor from our approved list. By the way – and I have to make sure everyone remembers this – How$mart is an energy efficiency program, not a home construction program. We can give you energy savings, but we can’t rebuild your home from scratch to make it totally energy efficient.

MH: How do you select contractors for the approved list?

MV: At this point, it’s easy on, easy off. We’ve had almost no issues. The homeowner can get bids, whatever they want. Ultimately, we do re-run the model based on the actual bid, which can change the maximum that we will pay. If the actual bid is more than our estimate, the customer will have to pay the difference. If the bid is less, then we might end up paying more or all of the project cost.

The last time I ran the numbers, Midwest was paying for about 75% of the costs. Typically, the homeowners cover 25%. The contractor invoices us for the work, and then the customer pays it off on their monthly bill.

MH: It’s almost like having a home loan on your electric bill. What happens if the customer moves?

MV: The payment stays on the premises. It stays with the house.

MH: What if the customer doesn’t pay?

MV: It’s part of their electric service. Lack of payment, just like lack of payment of their regular utility bill, it is cause for disconnection.

MH: Where do you get the funds to finance How$mart?

MV: The source of the funds is us, Midwest Energy – and however we are financing our ongoing capital needs.

We also have a partnership with the Kansas Housing Resource Corporation (KHRC) and its Kansas Energy Efficiency Program (KEEP), that helps us lower the interest rate. KHRC loans money to us – 50% of the cost of a residential project – at a zero percent interest rate. Then we can blend the cost of capital that we as a company face, with the zero interest money from KHRC.

This helps make more and more of the energy efficiency projects cost-effective. The KHRC is not loaning money to our customer directly, though, like it does when KHRC runs KEEP through a bank.

MH: Do any other Kansas utilities make use of KEEP funds like that?

MV: I don’t think so.

MH: When it comes to energy efficiency in rural areas… well, other than a rural electric co-op, who can provide those services? Especially when it comes to financing the improvements?

MV: There aren’t a lot of other options – certainly not to get the same coordinated level of service. Or to get the auditing, for that matter. We’re pretty much it, when it comes to delivering energy efficiency in our service area. We have the relationships and the connections and the financing model.

MH: As far as state regulators are concerned – well, as far as other utilities are concerned –is How$martSM a cost-effective energy efficiency program?

MV: It meets the TRC test. (MH: TRC stands for Total Resource Cost test, which is one of five tests that utilities and regulators use to gauge the cost-effectiveness of a program. The TRC measures the total costs and benefits of a program to the participant and the utility, plus the avoided costs of energy supply.) The How$martSM program is designed to get around market barriers.

It might not pass the RIM test (MH: RIM stands for Ratepayer Impact Measure, a more restrictive cost benefit methodology.) In a truly competitive market without barriers, if the program didn’t pass RIM, it wouldn’t happen.

MH: A truly competitive market is so far from where we are –

MV: Yep. So I settle for removing market barriers instead, and I use TRC. In particular, How$martSM gets around the landlord-tenant split incentive.

MH: How$mart is a pretty new program. I know you’re excited about it as a model, but what about in practice? What might you change or tweak in the future?

MV: At some point we might contemplate doing a preferred contractor status. It would accomplish two things – first, getting them to do the work quickly, or the work Midwest is paying for, anyway.

Second, we might want to give them incentives to meet higher energy efficiency standards. In other words, we want them to put in a heat pump with a SEER rating of 16 rather than the minimum standard of 13. Almost everything installed has been at least 14 or higher, actually. And rather than a minimum standard 80% furnace, our average furnace has been almost a 93%. But it would be nice to see a 96%.

Something I would change if I could – but I can’t – would be getting more qualified people. We have more work than can be done, really, with who we have available.

MH: You have a shortage of qualified labor? There’s a lot of opportunity in energy efficiency. Lots of jobs.

MV: Definitely. It’s also partly the population problem in western Kansas. All the young people leave. Other people leave. We have trouble keeping our linemen. The oil fields – they’re going crazy trying to find labor right now.

MH: Just to wind it up, I need to ask you something. What’s your favorite country music song?

MV: I’m not that big of a country music fan, but, probably “Front Porch Lookin’ In” by Lone Star.