Your Customers Call It - Head(wind)s or Tail(wind)s?
We seem to be living in a Schroedinger’s Economy right now, where - depending on who you listen to – we are either almost certainly heading into a recession or the economy is correcting itself before our eyes given government action and market forces. The likely situation is that both are happening but to different groups of people within the United States and abroad.
The goal of this blog post is not to sift through the potential winners and losers of what’s happening, but to remind everyone that there are people out there – your customers – who need and would benefit from your help.
I started this blog thinking about the Inflation Reduction Act and how the climate change-targeted funding (energy- and water-related) could or would dovetail with your programs to drive participation. But concerns about the economy could also chill customer participation and investment right now.
So, which is it? And what can you do?
Headwinds: A Recession?
There is no question that your customers – residential and business – are experiencing higher prices driven by inflation. The inflation rate in July 2022 was 8.5%, slightly lower than market forecasts of 8.7% and down from 9.1% in June. That’s still a significant jump. More importantly – and relevant to your customers and programs – the energy consumer price index (CPI) rose by 32.9%. While this is still driven by gasoline costs, natural gas and fuel oil prices are both growing, and electricity prices grew by 15.2% (the most since February 2006, likely tied to natural gas price increases). [Note: with that electricity price increase, water and wastewater facilities will have no choice but to increase their prices as well.]
For low-income families, this trend is hugely concerning. The national energy burden – defined as the percentage of gross household income spent on energy – for low income households is 8.6%, three times higher than that of non-low income families. An energy CPI over 30% is going to double that energy burden every two to three years, eating into what little discretionary income was available.
Based on rising prices and discretionary income decreases, and due to overhiring to ensure sufficient talent to support aggressive growth, tech companies and “tech-adjacent” companies (e.g., consulting firms) are forecasting lower growth rates and are instituting layoffs and hiring freezes. Beyond tech companies, however, news articles indicate that some manufacturers – notably auto manufacturers – are also considering layoffs and hiring freezes, again given similar concerns.
Those experiencing the layoffs will have difficulty finding new jobs given the hiring freezes and will be hit with the same inflationary impacts as lower income families. This could be of sufficient scale to magnify further drops in revenue, leading to even further layoffs. The drop in demand for goods and services will serve to counter inflationary pressures, not that it’s much consolation to those who have lost their jobs.
The upshot: Low to moderate income customers, and tech or manufacturing workers experiencing layoffs, will need help from utilities. This may require similar financial assistance as was provided during the pandemic. And, where will the funds for customer investments in efficiency, conservation and decarbonization come from?
Tailwinds: Government to the Rescue?
The primary piece of legislation introduced by Congress and signed into law to combat inflation and recession is the Inflation Reduction Act. For the focus of this newsletter, the bill combines an array of tax credits, financing and government programs to the tune of $369 billion to address climate change and energy security. Specific provisions and programs will help target funds and credits to low- to moderate-income customers (and even the moderately, if not very, wealthy).
Question number one – will the bill reduce inflation? It can, to a degree. Over time, the bill is likely to reduce some inflationary pressures. It is intended to spur domestic renewable energy production and domestic manufacture and assembly of components, which over a longer period can stabilize energy costs and address supply constraints. And a non-climate provision should reduce health care costs for prescription drugs. But the bill does not address supply issues for goods and services and other factors contributing to inflation.
[Note to water utilities: the Inflation Reduction Act includes $4 billion for drought management. Join the Alliance for Water Efficiency in calling for some of those funds to be used on urban water conservation, especially to reduce landscape irrigation demands.]
Question number two – will the bill help address the recession? The bill certainly wants to see increases in renewable energy production, investments in energy efficiency and purchases of electric vehicles and appliances. If consumers have the funds to make those investments and buy those goods, new (albeit different) tech jobs will be created, and total energy burden would be reduced.
But, with the economy as it stands now, will business and consumers have the funds to make these investments?
Customer Programs: What Can You Do?
Your programs and services are in a unique and critical place to help the Inflation Reduction Act achieve its objectives of investment in energy security and decarbonization. But you have some work to do to address potential areas of confusion and encourage your customers to both participate in your program and take advantage of Inflation Reduction Act funding.
Here are actions you can take:
Familiarize yourself with the bill and its overlap with your programs. AIQUEOUS has completed our analysis of the bill and we have found intersection with weatherization, residential appliance and HVAC, residential whole home retrofit, commercial retrofit, customer renewable energy and electrification programs. Your program activities and funds, combined with Inflation Reduction Act funds, can sustain and even grow participation. [Note: if you want an analysis of the Inflation Reduction Act and how your programs can benefit, contact AIQUEOUS at info@aiqueous.com].
Start communication now to minimize confusion. Eligibility requirements in the Act may not align with your current program designs. Heat pump efficiencies, for example, need to meet the highest efficiency tier at the Consortium on Energy Efficiency. Tax credits for electric vehicles won’t be available for many of today’s makes and models because of (a) how much they cost and (b) the original cost of their materials or (c) location of assembly. You don’t want customers to participate in your programs and find out later that they are not eligible for Inflation Reduction Act funds.
Start addressing any evaluation concerns now. Given the current economic climate, leveraging Inflation Reduction Act funds may be necessary to meet regulatory goals for energy efficiency programs in particular. If you have any concerns about mixing these funds with your program dollars to meet your goals, start talking to your third party evaluators now. Experience with the American Recovery and Reinvestment Act of 2008 can be helpful in this discussion.
Ultimately, we continue to voyage in uncertain times with changing winds. There are a lot of your customers who need your help right now, and Congress has passed legislation and intersects with your programs and puts you in a position to do a lot of good. We encourage you to embrace the opportunity and to get ahead of it, and we can help provide information and insights on what you can do. Please reach out to us at info@aiqueous.com or visit us at https://www.aiqueous.com and let us know what we can do.
