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A study will look at how the city could use utility bills to expand access to energy efficiency programs.

The city of Minneapolis is exploring an emerging model for paying for energy efficiency improvements through customers’ utility bills.

Supporters of “inclusive financing” say it can help broaden access to energy efficiency programs, which often fail to reach renters, lower-income customers, and those with poor credit scores.

“We have to find a way to expand clean energy efforts to a much larger population,” said Ellen Anderson, executive director of the University of Minnesota’s Energy Transition Lab, which is using a $50,000 grant from the city and McKnight Foundation to study how the model could be deployed.

Anderson said inclusive financing could be essential to the city’s sustainability goals. “Unless everyone participates — and not just people who can afford it — we won’t be able to reach the city’s carbon reduction goals,” she said.

At least one critic cautioned, however, that the approach could compete with existing programs that might better serve lower-income customers.

How it works

John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance, has long been a fan of on-bill, inclusive financing because it does not require customers to take on debt or submit credit scores. He wrote a research paper in 2016 on a type called Pay As You Save (PAYS).

Here’s how it works:

A utility customer becomes aware of an energy saving opportunity in their home and applies for on-bill financing through their utility.

The program administrator evaluates the project and potential savings. If it qualifies, the utility or a partner pays a contractor to complete the project.

The utility adds a charge to the monthly bill for the customer’s address, but the charge is smaller than the monthly cost savings created by the project.

Customers are guaranteed immediate savings on their monthly bill, and if they move the charge — and benefits — remain for the next resident.

Farrell’s paper revealed half the customers who received offers in the PAYS program accepted them compared to just 10 percent in debt programs. The size of projects was also nearly twice those under debt-based systems. The system has the added advantage of reaching often hard-to-reach renters, which in Minneapolis represent more than half the population.


The payment model was created two Vermont businessmen, Harlan Lachman and Paul Cillo. Lachman spoke a community forum last month hosted by Minneapolis Community Power, the Sierra Club, MN350, Eco-Faith, and Minnesota Interfaith Power & Light.

PAYS has some parallels to Property Assessed Clean Energy (PACE), but Lachman said the system has advantages in that it doesn’t involve consumer debt, which is governed by consumer laws overseen by courts. Unlike PACE, PAYS provides immediate savings and offers a unique safeguard: If upgrades fail, customers no longer pay.

The programs can be operated by the utility or a third party vendor. Utilities can fund them using operations or energy conservation budgets. In some cases, federal money or rural utility financing corporations have served as capital sources.

A primary selling point from PAYS advocates is that the programs reach lower income customers or those with poor credit scores. PAYS requires no credit scores. “This allows them to serve all customers, not just credit worthy customers or building owners,” Lachman said.

That has boosted participation compared to debt-based programs. Between 1 percent and 4 percent of customers have participated in existing pilot programs, Lachman said. Hospitals, schools and cities can participate, too, without increasing their budgets or taking on debt.

Utilities see the program as a way to save energy and meet state guidelines, he said, and they receive some financial protection by having the ability to disconnect customers who have not made payments. That hasn’t been an issue, however. The non-payment rate of PAYS clients is less than 1 percent, lower than that of utilities and common consumer loans, which typically see a 1 to 3 percent default rate, he said.

Critic urges caution

John Howat, senior energy analyst for the National Consumer Law Center,  said Minnesota has long-established and well regarded energy efficiency programs. If on-bill financing replaced current programs shouldn’t take away from existing programs that don’t cost anything to participate in.

“We have deep reservations, particularly in areas where they are current low-income efficiency programs that don’t involve the customer making repayments or upfront payments,” Howat said.

Follow up by program operators seems to be lacking, he said, and renters inheriting charges might not receive the same benefits because they have “different use patterns,” he said. And some utilities are reluctant to finance because they don’t want to become loan collectors.

“If you are in a jurisdiction where there are no programs, you have to look at innovative ways to jumpstart some programming,” Howat said. “But in a state like Minnesota, where there are good mature programs operating that involve zero contributions or payments on the low-income side, this is dangerous.”

Next steps in Minneapolis

The PAYS model is already used in seven states, including Kansas, Missouri and Arkansas, and serves customers of 17 utilities, including two investor-owned utilities. The Minneapolis study will look at how it might work in a colder climate where more project would involve heating, Farrell said.

Several Minneapolis city council members expressed support for the program because the design seems to insure participants save money on upgrades and can afford the cost.

“It’s a pretty conservative program. They factor in the risk to make sure there will be savings throughout the life of the upgrade, and that (participants) will be able to pay the money back for the investment,” said city council member Jeremy Schroeder, who sits on the city’s Clean Energy Partnership board.

What drew Schroeder’s interest is the program’s accessibility to lower income residents, apartment dwellers and residents without good credit ratings. Those people are shut out of most efficiency programs, he noted.

PAYS “ seems, to me, a no-brainer.”

Frank is an independent journalist and consultant based in St. Paul and a longtime contributor to Midwest Energy News. His articles have appeared in more than 50 publications, including Minnesota Monthly, Wired, the Los Angeles Times, the Minneapolis Star Tribune, Minnesota Technology, Finance & Commerce and others. Frank has also been a Humphrey policy fellow at the University of Minnesota, a Fulbright journalism teacher in Pakistan and Albania, and a program director of the World Press Institute at Macalester College. Frank covers the state of Minnesota.