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Introducing Optimus: A Financial Modeling Tool Powerful Enough to Unlock the IRA’s Full Potential

Now advocates, regulators, utilities, and investors are on equal footing to redefine our energy future.

The Inflation Reduction Act (IRA) fundamentally shifted the strategic landscape for utilities through an array of key changes to utility financial and tax incentives. This shift has the potential to benefit all utility stakeholders by catalyzing rapid and affordable decarbonization. But achieving these critical outcomes is not a sure thing, won’t happen overnight, and will require utilities to actively modify their business models. RMI’s utility financial modeling tool, Optimus, has the power to inform how to deliver the promises of the IRA and drive an equitable transition.

The Problem

Today, more than seven months after the passage of the IRA, only a handful of utilities have developed a clear action plan to take advantage of the IRA to accelerate their decarbonization targets. And it remains difficult for all utility stakeholders — especially advocates for energy consumers and communities — to understand how to leverage the IRA to produce equitable outcomes. Indeed, advocates need to actively engage in utility proceedings to ensure IRA benefits flow through to customers and communities; utility regulators must update process requirements to ensure utility proposals are carefully reviewed and aligned with IRA programs; and utilities must overhaul their resource, financial, and regulatory strategies to optimize the potential benefits of the IRA, which can accelerate earnings growth while minimizing financial and system risks.

Existing modeling tools fall short of producing a comprehensive picture of the far-reaching impacts of the IRA across various stakeholders. They don’t address the persistent information asymmetry between advocates and utilities. But Optimus can.

The Win-Win Scenario

This tool leverages RMI’s extensive modeling experience, comprehensive public data resources from RMI’s Utility Transition Hub, and a full suite of IRA incentives to chart a “win-win” trajectory for utility customers and shareholders alike. Advocates can better understand the tax and financial barriers facing utilities and find out how the IRA and Infrastructure Investment and Jobs Act (IIJA) incentives may alleviate them.

For example, utilities can leverage tax credits and the Energy Infrastructure Reinvestment (EIR) loan program to reduce the cost of deploying clean energy while remaining attractive to investors, thereby maintaining access to low-cost capital. Utility regulators are now equipped with a list of tax and financial incentives available from the IRA and IIJA to help them design advanced ratemaking mechanisms, which should align utilities and their stakeholders on an equitable decarbonization pathway. Optimus provides analysis that allows advocates, regulators, and utilities alike to uncover and suggest actions necessary to support a rapid energy transition that does not cause major rate hikes or adversely impact fossil-dependent communities.

Optimus was originally designed to address challenges facing stakeholders in the integrated resource plan (IRP) and rate case proceedings. However, it’s flexible enough to be applied across a variety of use cases, offering a range of insights for different audiences.

Use Cases: Optimus can provide asset- or utility-specific insights to remedy the information asymmetry in engagements by consumer and customer advocate groups. It can provide information to suggest process changes necessary to achieve decarbonization targets by state regulators and legislators and inform investment decisions by developers or utility executives. It can also provide a benchmarking framework to inform the prioritization of investment opportunities, policy implementation strategies, and procurement plans. When it comes to illustrating IRA applications, it can show how IRA tax credits and bonuses for domestic content, or siting clean resources in energy communities, could enable much deeper customer savings from a more rapid renewable and storage deployment; or, it can estimate the value of combing the tax credits with EIR financing to mitigate the financing cost of grid upgrades needed to support clean energy deployment.

Time Horizon: Optimus can model a short time horizon (e.g., rate cases); or longer-term systematic changes (e.g., decarbonization studies or transmission planning scenarios).

Level of Granularity: Optimus can assess single-asset economics, or aggregate portfolios of assets to provide a wholistic view of system-level impact.

The following case study illustrates Optimus’ ability to uncover risks as well as new opportunities afforded by the IRA that have been overlooked by capacity expansion models or cost-of-service (COS) studies alone.

Case Study: Duke Energy’s carbon plan – new gas or net zero?

In May 2022, Duke Energy filed its proposed Carolinas Carbon Plan with the North Carolina Utilities Commission (NCUC), which provided a path to reduce 70 percent of carbon emissions by 2030 and achieve carbon neutrality by 2050. The question for commissioners was, “Is this the least-cost and most equitable way to reach net zero?”

Environmental stakeholders in North Carolina set out to answer this question with help from Synapse Energy Economics and RMI. RMI and Synapse partnered to deploy an integrated modeling approach using the EnCompass capacity expansion model (to identify alternative least-cost pathways), and the Optimus model (to assess the relative costs and risks borne by customers under various pathways). The EnCompass model demonstrated that there were at least two more affordable pathways that could maintain reliability and achieve deeper decarbonization than Duke Energy’s proposal.  The two alternative pathways relied on higher penetrations of renewable resources coupled with energy efficiency instead of the new gas power plants proposed in Duke’s carbon plan (see Exhibit 1).

With Optimus, RMI assessed how customer rates and average bills would be impacted by the Duke Energy proposal compared to the alternative resource pathways under a variety of sensitivities: a performance-based regulation framework, fuel price spikes, and higher electric load growth. The alternative pathways with higher penetrations of renewable resources were found to better protect ratepayers from the risk of potential cost increases. At a time when households and businesses are facing extraordinarily high bills tied to volatile natural gas prices, the importance of cost-risk reduction can’t be overstated.

The IRA was passed three months after Duke Energy’s carbon plan proposal was filed. As such, the cost savings opportunities and benefits were not included in Duke’s modeling, which means that its carbon plan proposals were underrepresenting the cost savings opportunities presented by the new federal programs and tax credits. The RMI team also used Optimus to assess how specific IRA financing tools — such as the EIR program and changes to tax incentive rules — could mitigate key barriers and risks to more rapid renewable development. Though it was not feasible to perform comprehensive quantitative analyses of IRA impacts for the carbon plan proceeding due to the regulatory timeframe, RMI’s final report and testimony featured a qualitative evaluation of IRA impacts material to the development of the carbon plan. We recommended that Duke perform a comprehensive quantitative assessment of these impacts.

In its final decision, the NCUC required Duke to incorporate the IRA and other federal cost-saving opportunities into the future carbon plan proposals and into any Certificate of Public Convenience and Necessity (CPCN) applications it files in the interim.

Exhibit 1. Near-term Costs and Cost Savings for Ratepayers in North Carolina

Who should be using Optimus?

A variety of stakeholders need to understand the financial implications of utility decarbonization to better protect customers, inform policy, and choose good investments. Overlooked risks hidden within competing portfolios can mean the difference between more affordable or more burdensome bills for ratepayers; it can also be the difference between a growing utility with a reliable grid and one headed towards blackouts and bankruptcy for utility management and investors. To decarbonize the electricity sector at the rate necessary to avoid the worst impacts of climate change, we can and must identify win-win propositions for all stakeholders. Optimus can help chart a path forward that can take full advantage of IRA incentives to achieve outcomes that can meet stakeholder goals:

Advocates: A flexible model, tailored to local needs, can empower successful interventions that ensure the IRA is fully leveraged and that benefits are passed through to ratepayers and communities.

Regulators and policymakers: Individual project cost-benefit analysis is no longer enough to assess decarbonization action plans. A portfolio-level model is necessary to assess how the risks and rewards associated with various proposals are distributed among stakeholders.

Utility investors: Comprehensive sensitivity analysis can map out the full spectrum of risks and identify the most reliable, lucrative, and resilient investments.

What’s next?

Accurate and accessible information can align everyone toward equitable, affordable decarbonization. RMI’s team is actively working on a nationwide, utility- and state-level Optimus IRA analysis to support conversations surrounding implementation. We are also continuously developing additional Optimus functionality to provide analytical support for questions surrounding financial and system risk in more flexible ways.

If you are interested in using Optimus’ analytical tools for either high-level or tailored insights, please contact us.

Additional technical and editorial support provided by RMI’s Optimus Team: Uday Varadarajan, Diego Angel, Jacob Becker, Rachel Gold, David Posner, and Gennelle Wilson.