On Thursday, the Minnesota Public Utilities Commission (PUC) approved a proposal to modernize the Energy Conservation and Optimization (ECO) financial incentive, which utilities are eligible to earn when they meet pre-determined performance goals through their ECO programs. The proposal, developed by the Department of Commerce, Division of Energy Resources (Department), Center for Energy and Environment (CEE), and Fresh Energy, adds new performance metrics in low-income spending, energy savings from air sealing and insulation measures, permanently avoided electric demand, and efficient fuel-switching.
In 2021, the ECO Act modernized Minnesota’s existing energy efficiency policy framework by incorporating efficient fuel-switching and load management programs and updating goals for energy savings and utility spending on low-income programs. However, the legislation did not directly affect the financial incentive mechanism, which is approved at the start of each ECO Triennial planning period through a regulatory process at the PUC. Although the calibration of the incentive is revisited each Triennial, the performance metrics themselves remained largely unchanged until Thursday’s decision.
Historically, the size of the incentive has been based only on achievements in first-year energy savings and cost-effectiveness, meaning the only way for utilities to increase their incentive was to improve their performance in these areas. The newly approved 2027–2029 mechanism expands these performance metrics to better reflect the full range of policy goals and program areas covered by ECO. Utilities will now be rewarded not just for achieving first-year energy savings in cost-effective ways, but also for investing more in low-income programs, increasing the adoption of insulation measures, rebating ASHPs and other EFS measures, and more.
Approved Metrics for the 2027–2029 Financial Incentive Mechanism
(New metrics shown in blue)
Metrics for all investor-owned utilities
First-year energy savings and cost-effectiveness (measured as Minnesota Test net benefits) continue to be core metrics for both gas and electric investor-owned utilities (IOUs). Although these metrics have always been important, they will now be balanced with the new metrics outlined above.
Low-income ECO programs provide essential benefits to low-income customers, reducing energy bills, improving comfort, and in some cases, making homes healthier for customers. Despite the importance of these programs, they are typically not cost-effective and were therefore not emphasized under the previous mechanism. Now, with the newly approved 2027–2029 mechanism, a portion of the incentive can only be unlocked by meeting and exceeding low-income spending goals, more effectively motivating IOUs to prioritize investments in low-income programs.
Metrics specific to gas IOUs
Gas IOUs will have a new air sealing and insulation metric that rewards first-year energy savings from measures like attic and wall insulation and envelope air sealing. These measures produce long-term, fuel-neutral energy savings, increasing comfort for customers and lowering energy costs, and are also a precursor to affordable efficient fuel-switching in buildings, as weatherizing a home decreases the size requirement for a heat pump. As important as these measures are, they also tend to be costly and can be challenging to implement. A specific air sealing and insulation metric will better motivate utilities to pursue these measures, despite the obstacles.
Metrics specific to electric IOUs
EFS measures, such as switching a customer who heats with natural gas or propane to an air source heat pump (ASHP), are now allowed under ECO so long as they result in a net reduction in energy consumption and greenhouse gas emissions and are cost-effective. Although electric utilities cannot count EFS energy savings and net benefits towards their traditional ECO incentive under state statute, the 2027–2029 mechanism introduces a separate electric EFS incentive based on EFS net benefits to reward utilities for these measures.
In their Comments on the incentive proposal, Xcel Energy proposed the addition of a permanently avoided demand metric to the electric IOU mechanism to better reflect the growing importance of demand savings when valuing electric energy efficiency. CEE, the Department, and Fresh Energy supported the addition of this metric, and it was approved by the PUC.
Together, the approved performance metrics result in a more holistic evaluation of ECO portfolios, rewarding utilities for the challenging task of balancing multiple program priorities. In developing the incentive mechanism proposal, CEE worked closely with the Department and Fresh Energy, as well as utilities and other stakeholders over the past year. CEE appreciates the extensive engagement from stakeholders and commends the PUC for approving a mechanism for 2027–2029 that captures the range of programs and potential benefits possible under ECO. With the additional performance metrics outlined, the utility financial incentive will be a more effective regulatory tool for ensuring well-balanced and meaningful ECO portfolios.
