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Time To Consider a Thermal "System Benefits Charge"?

Over the years electricity and, more recently, transportation fuels, have received the lion's share of attention from energy policy makers. Thermal energy, on the other hand, has been largely overlooked by state and federal lawmakers seeking to promote efficiency and renewable energy. Yet heat represents more than one-third of all energy consumed in the U.S., and many states have endorsed ambitious renewable energy goals that simply cannot be met without meaningful attention to thermal energy. For example, many states have endorsed 25 x'25, which proposes that 25% of all energy consumed come from renewable resources. This goal is unlikely to be achieved without thermal energy receiving the same attention as electricity and transportation fuels.

Well before most states and/or the federal government had enacted renewable electric or fuel mandates, many states imposed modest surcharges on electricity and natural gas, with the revenues used to finance efficiency programs.  Often referred to as “system benefits charges” (SBCs), these programs have funded billions in efficiency and conservation programs for utility customers.

A defining characteristic of SBCs is that they are nearly universally imposed on customers of regulated electric and natural gas utilities, and conveniently collected through utility bills.  The incentives made possible by these funds are limited to utility customers and generally do not fund programs that eliminate the customer’s use of the regulated energy.  For example, SBC funds cannot be used to pay for fuel switching to a renewable technology that eliminates a customer’s use of electricity or natural gas.  Instead they typically fund gas or electric efficiency or conservation measures while retaining the customers dependence on these non-renewable energy sources.  It’s reasonable that those who pay should receive the benefit, but the inability to fund the switch to renewables greatly narrows the potential benefits, especially for heating.

Perhaps it is time we took a hard look at SBCs on unregulated fuels such as heating oil or propane, two expensive and often imported fuels. This is not a new idea, as some states have considered legislation imposing modest fees on these fuels, but with very restrictive uses for the funds.  In Massachusetts, for example, a heating oil/propane SBC of $0.025/gallon is proposed to fund efficiency upgrades with the proceeds used to cost-share installation of more efficient oil or propane heating systems (ironically perpetuating dependence on these costly and non-renewable fuels).  If the SBC were to be extended to include the funding of efficient bioenergy heating equipment that uses wood pellets or wood chips or include biodiesel used as a liquid heating fuel then perhaps a more comprehensive and fuel neutral program focused on thermal efficiency and renewables could be developed.

Implementation Concepts

A thermal SBC would take the form of a modest assessment administered at the state level on a diversity of unregulated heating fuels such as heating oil, propane, kerosene and wood pellets that have well established distribution systems.  It is expected that the importers and distributors of these fuels would pass the assessment along to the consumer in the form of slightly higher energy costs.

The revenues derived would be deposited in a non-lapsing fund in each state.  The fund would be administered by an appropriate state agency or quasi-public commission (with public and private oversight).  The purposes of this fund would be to:


(a) Finance a comprehensive program of education, outreach and incentives to residential, commercial, municipal, and industrial consumers to encourage them to install thermal renewable energy technologies, combined heat & power technologies, or community-scale district heating (e.g. it could offer a one time upfront rebate against verified installed cost of such systems).  Other possibilities include grants, incentives, low/no interest loans, administration of revolving loan funds, property tax credits, business tax credits etc.;

(b) Support the distributors and installers of conventional fossil heating fuels and systems in adopting alternative thermal renewable technologies and fuel distribution (this would help those businesses negatively impacted by the imposition and collection of the SBC fee to transition to new business opportunities in thermal renewable technologies), and in assisting their customers in replacing old inefficient oil and propane appliances with new systems that meet minimum efficiency requirements;

The size of the fee would decline over time as new renewable thermal energy business sectors reach critical mass and are able to flourish without support from the SBC; or, as the cost differential between fossil and renewable energy cost grows wider and free market economics are sufficient to drive the transition and meet state goals.  Conceivably the fee could be phased out in as short a period as 5 years.  In addition, the fee could be reduced or waived during periods of unusually high market pricing for fossil energy, and reinstated when market pricing drops – providing a so-called “price floor.”

This approach combines a traditional SBC on fossil fuels with a commodity “check-off” program on pellets or biodiesel, similar to those widely administered in support of marketing and R&D for agricultural commodities (examples include national promotional campaigns for milk, eggs, pork, beef, and more recently, softwood lumber).   However, check off programs have generally been sanctioned by Congress and applied nationwide, not state by state.


The implementation of the thermal SBC will be complex and challenging.  There are many important considerations that must be addressed.  Among these are:

  • Whether or not to tie the SBC to the achievement of measurable goals, such as many state RPS programs do.
  • Who will provide monitoring and verification of progress toward meeting goals?
  • How much of a thermal SBC fee would be necessary and acceptable to consumers?
  • How to collect SBC fees on unregulated heating fuels such as cordwood?
  • How to ensure the efficient implementation of state programs and incentives while keeping bureaucracy and administrative costs to a minimum.
  • Fair and equitable access to funds by all sectors: residential, commercial, municipal, industrial.
  • Use of funds based on broad public policy objectives without technology or fuel bias.

Perhaps the most daunting challenge is the political one: I can think of few policies that would likely face stiffer opposition than a “tax” on heating fuels!  But the benefits – both to the national economy and environment – would be significant, especially due to the eventual retention of billions of fuel dollars that would otherwise leave the states that depend heavily on imported fossil heating fuels.  Anyone willing to explore the concept further?

Image: Dollar Concept via Shutterstock

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