Each year, nearly 3 million Americans have their power shut off, leaving them unable to heat and cool their homes or access essential services like the internet. Meanwhile, 1 in 7 families live in energy poverty. These families are forced to make difficult choices, often sacrificing necessities like food and medicine to keep their lights on, all while living under the constant threat of having their power shut off. Unsurprisingly, this energy affordability crisis hits low-income communities the hardest, particularly communities of color.

Compounding this issue is the difficulty these communities face in accessing clean energy technologies. Resources like energy efficiency, rooftop and community solar, and battery storage can provide various customer benefits, including lower bills and energy resilience and independence. However, the barriers to adoption remain high for those who need these benefits the most, due to high up-front costs, poor housing stock, and inadequate policy and regulatory support.

Improving energy equity requires a robust, multi-faceted policy strategy. State regulators, who oversee utility investment and program decision-making, have a crucial role to play in securing equitable policy reforms. One tool that regulators are increasingly using to promote equity is performance incentive mechanisms (PIMs). A PIM is a regulatory tool intended to realign utility incentives with desired outcomes by providing a financial reward or penalty for the utility’s performance on a specific metric. PIMs are increasingly being used to incentivize performance improvements in service of emergent outcomes, such as demand flexibility, reduced greenhouse gas emissions, and — more recently — equity. (Review a useful table of terminology here.)

In the past several years, at least seven jurisdictions have adopted PIMs tied to equity and affordability outcomes. For our purposes, we define these “equity PIMs” as mechanisms that incentivize improved utility service and/or increased spending for underserved communities, or enhanced affordability for all customers. Regulators in Colorado, the District of Columbia, Hawaii, Illinois, Massachusetts, New Jersey, and New York have adopted equity PIMs. Low-income energy burdens are particularly high in these regions, and public utilities commissions (PUCs) and legislatures are taking action to address this issue through PIMs as well as assistance tools and policies.

PIMs are one component of these states’ broader strategies to equitably decarbonize. The clean energy transition presents a significant opportunity to redistribute costs and benefits to better support the communities who have been disenfranchised by the historical system. However, that will only happen if utilities appropriately manage costs and direct investments to where they are most needed. PIMs and other tools can help ensure that utilities prioritize the least-cost investments to manage system costs, and they can also be designed to maximize benefits for underserved communities in the clean energy transition.

When PUCs were created in the early 1900s, they were tasked with regulation of utilities “in the public interest,” typically defined as ensuring safe, reliable utility services at just and reasonable rates for all customers. Over time, and through the work of community advocates, some states have begun to recognize inequities in the provision of services — observing that the traditional framework does not sufficiently deliver on the public interest for all customers. For example, in some of the most recent and severe outages in the United States, such as the outage caused by Winter Storm Uri in Texas, BIPOC and low-income neighborhoods suffered the longest and most frequent loss of power. In addition, BIPOC households face higher residential energy expenditures than white households even when controlling for income, household size, homeowner status, and city of residence.

While some factors driving inequitable outcomes, such as income, may be outside of direct utility influence, others may be exacerbated by past utility actions or by underlying incentives for the utility. For example, utilities have a muted incentive to help reduce the amount of arrearages, or customer debt, and disconnections, which disproportionately affect BIPOC households. This is because utilities can typically pass on the debt associated with customer arrearages to all customers, so that it does not significantly impact their revenue. In some cases, utilities may continue to expose disconnected customers to debt collection even though ratepayers have already been charged for the “uncollectibles.”

What’s more, even programs that may be designed to support customer energy burden, such as an energy efficiency program, do not necessarily result in equitable outcomes. Existing energy efficiency PIMs are typically designed to maximize net benefits, energy savings, or spending on energy efficiency in an entire service area. Such incentives result in programs designed for least-cost acquisition of energy efficiency — often from large commercial customers or through residential lighting — at the expense of programs that focus on savings that benefit low-income customers. At bare minimum, customers should reap the benefits of energy efficiency programs at least as much if not more than what they are charged in their bills to sustain such programs. Yet, many utilities have a history of underspending on these populations when they offer these programs — so the customers who need the benefits of energy efficiency the most end up subsidizing it for their neighbors.

In light of these revelations, some states are taking action to embed equity as a desired outcome of the utility regulatory framework, such as by granting the Commission the authority to consider equity broadly in assessing utility proposals, instituting requirements for utility programs and investments to prioritize certain communities, or changing internal and external PUC processes to support procedural equity. Other states are setting minimum targets to provide a certain portion of the benefits of the energy transition to underserved communities.

Such changes to regulation and policy mandates are important steps for states that aim to prioritize equity in their decision-making. However, they may not be enough to change how utilities operate without further addressing and adjusting the incentives utilities face, both broadly and in the context of specific programs, such as energy efficiency and demand response.

PIMs are one approach to change utility incentives to align with desired policy outcomes, by directly offering financial rewards for utility behavior that advances equity, and penalties for behavior that neglects it. Depending on their design, PIMs have the potential to remove perverse disincentives to progress on equity across broad utility services and specific programs, including actions to mitigate existing harms on the system, such as disproportionate disconnections or siting of energy infrastructure in underserved communities. PIMs can also encourage utilities to collaborate more effectively with communities and program implementors.

Whether these “equity PIMs” change the way the utility does business depends heavily on their development, design, and implementation. Given the importance of PIM design in achieving desired changes to incentives and outcomes, we describe below the landscape of equity PIMs based on research in RMI’s PIMs database, identifying trends and emerging approaches. We then describe metrics and scorecards for PIMs, which may serve as a glimpse into the future of equity PIMs, as data collection through scorecards can be a precursor to establishing a PIM. Finally, we conclude with reflections on other regulatory mechanisms to support equity beyond PIMs, through other business model and regulatory reforms.

Energy equity is typically defined along four dimensions of equity: recognition or structural, procedural, distributive, and restorative. To date, equity PIMs have primarily addressed recognition and distributive equity.

Specifically, regulators have adopted PIMs to mitigate harms in the current system like energy insecurity and power outage disparities (recognition) and to more evenly deliver benefits from energy efficiency and clean energy (distributive). PIMs have not addressed access to regulatory processes and decision-making (procedural) or reparations for past injustices and community empowerment (restorative).

In addition to PIMs, a growing number of regulators are adopting reporting metrics and scorecards to track progress against equity outcomes. Reporting metrics consist solely of a metric, while scorecards include a metric tied to a performance target. As with PIMs, regulators have primarily established reporting metrics and scorecards to address recognition and distributive equity (see the Other Equity Performance Mechanisms: Metrics and Scorecards section below).

PIM intent and design looks very different across the seven jurisdictions that have established equity PIMs. The following tables show the landscape of equity PIM design to date.

The following PIMs incentivize improved energy affordability, security, and/or reliability in the current system:

The following PIMs incentivize a more equitable distribution of benefits from new investments and programs:

Energy efficiency PIMs

Of these established equity PIMs, the most common approach incentivizes targeted energy efficiency savings in low- and moderate-income (LMI) and other underserved communities. Five jurisdictions — Hawaii, the District of Columbia, Massachusetts, New Jersey, and New York — have adopted such a PIM. Traditional energy efficiency PIMs, which encourage increased energy efficiency savings, were among some of the first PIMs established several decades ago, and many jurisdictions have long histories of designing and implementing these types of PIMs. However, as discussed above, energy efficiency programs have historically neglected underserved communities, despite their greater need for upgrades.

Equity PIMs for energy efficiency represent a recent evolution of energy efficiency PIMs. They are typically structured like traditional energy efficiency PIMs but carve out a specific proportion of overall energy efficiency spending or resulting savings for LMI and underserved communities to more equitably distribute the benefits of weatherization, efficient appliances, and other upgrades. Equity PIMs for energy efficiency showcase how PIMs can evolve over time as regulators, utilities, and their stakeholders glean learnings from implementation and as regulatory priorities shift. Both New York and Massachusetts had traditional energy efficiency PIMs in place prior to adopting new equity-focused components within or similar to their existing energy efficiency PIMs. In both cases, this change happened alongside the enactment of state climate legislation with specific recognition and distributional equity provisions.[1]

Program-based versus outcome-based PIMs

Most of the current equity PIM landscape is program-based, meaning the incentives are tied to utility achievement within specific programs such as residential customer energy efficiency or electric vehicle programs. There are several outcome-based equity PIMs, however: the New York and Illinois PIMs focused on reducing residential service disconnections (and uncollectible expense and customer arrears in the case of New York) and the Illinois PIMs focused on improving distribution system reliability in environmental justice communities and promoting supplier diversity. For these mechanisms, the regulator established a broad intended outcome, giving the utility the flexibility to adapt their operations to meet the specified targets and earn the associated incentive.

Outcome-based equity PIMs may not always be feasible. Many jurisdictions leverage utility programs as a primary vehicle for promoting customer equity and affordability, and tie PIMs to improved performance in such programs. What’s more, certain outcome-based PIMs may not be permissible by statute in some states. However, as an increasing number of states aim to confront challenges such as growing energy poverty, outcome-based PIMs may be a more appropriate solution to target utility efforts and offer flexibility in how to achieve those outcomes.

PIMs that reduce customer disconnections, especially for underserved communities, are one outcome-based model gaining momentum among regulators. In addition to the New York and Illinois examples referenced above, the Connecticut Public Utilities Regulatory Authority recently proposed a PIM to incentivize the utilities to limit disconnections for low-income and medically vulnerable customers, and the Massachusetts Department of Public Utilities is currently considering more robust disconnection protections. Notably, regulators are also prioritizing reductions in customer arrears across these examples. Some of New York’s PIMs include arrears reduction targets that the utilities must meet to earn rewards, and the PIMs in Illinois and the proposed PIMs in Connecticut both include language directing the utilities to adopt strategies to address arrears as they decrease disconnections.

Many states have disconnection policies in place to protect customers from shutoffs during winter or summer months, to ensure adequate communication with customers at risk of disconnection, or to shield particularly vulnerable households, such as those with elderly residents. These particular states are going a step further by encouraging utilities to directly reduce the use of disconnections altogether, especially for those who are most vulnerable. For other states similarly aiming to limit disconnections and secure energy access for all customers, PIMs may be an effective tool.

PIM symmetry

Most of the existing equity PIM incentives are structured as either upside-only or symmetrical. Upside-only PIMs provide the utility an opportunity to earn a reward should it meet its targets, whereas symmetrical incentives provide an opportunity to either earn a reward or incur a penalty based on performance. In states concerned with the net costs of PIMs, downside-only or symmetrical PIM structures may be a helpful model. Whereas PIM rewards are typically recovered through a relatively minor line item on all customer bills, penalties do not impose any direct costs on customers.

Existing symmetrical equity PIMs tend to penalize utilities for failing to meet a specified requirement (e.g., to provide a specified proportion of benefits to specific target communities) or a core service obligation (e.g., to provide adequate reliability to all customers, including underserved communities). In designing equity PIMs, regulators and stakeholders may consider where a PIM could usefully support utility growth into a new service area and where it might provide some accountability to ensure that the utility meets basic expectations around equity and affordability. A reward might be more appropriate for the former, and a penalty for the latter.

Equity PIMs represent a relatively nascent area for PIM development, and they carry specific questions for regulators: When is it appropriate to design a PIM focused on a specific subset of customers versus improving outcomes for all customers? When PIMs are appropriate, how can they be designed to ensure that the burden of costs is distributed fairly without exacerbating affordability challenges? Given this uncertainty, establishing a timeframe for revisiting and assessing how PIMs are working in practice can ensure that the mechanisms are producing desired results,[2] and can help regulators feel more comfortable adopting equity PIMs.

Finally, while this landscape of equity PIM design sheds light on how and why regulators are developing PIMs to incentivize more equitable outcomes — and could provide other interested jurisdictions with useful models for designing equity PIMs of their own — it’s important to note that we do not yet have substantive insight into how utilities have performed against these mechanisms. Most of these equity PIMs were established in 2021 or later. RMI’s PIMs Database will eventually expand to include data on utility performance, which will unlock insights into the relative effectiveness of equity PIMs in driving performance improvements against desired outcomes.

Not all metrics to measure aspects of equitable utility service or performance may be appropriate for PIMs. In these instances, reporting metrics and scorecards may serve as a useful alternative or an intermediate step on the way to establishing an equity PIM. Reporting metrics consist solely of a metric, while scorecards include a metric tied to a performance target. Even without an explicit financial incentive, these performance mechanisms can provide an implicit “reputational incentive” for the utility to improve its performance, since it can influence the company’s standing with customers, regulators, and shareholders.

Many regulators adopt reporting metrics and scorecards before adopting PIMs. Reporting metrics can provide the requisite data for setting targets, and scorecards can provide the requisite opportunity for testing those targets to assess whether an eventual PIM is appropriate.

Some reporting metrics and scorecards can continue to provide useful information without ever evolving into PIMs. Equity metrics focused on procedural equity or restorative justice may be particularly appropriate for reporting metrics and scorecards. For instance, it might be helpful to establish a reporting metric for the utility to make transparent its efforts to build and maintain relationships with underserved community members and how the utility has reflected or acted upon their input in the development of programs or resource planning. It may not be desirable or feasible to attach an appropriate financial incentive to this, because doing so could “flatten” efforts to build meaningful relationships or create an opportunity for utility “gaming.” For instance, introducing a PIM may unintentionally encourage the utility to prioritize superficial interactions with underserved communities in pursuit of the financial incentive, rather than fostering genuine, long-term relationships. Accordingly, maintaining reporting metrics and scorecards may provide visibility into the utility’s efforts without creating unintended consequences.

PIMs, which offer regulators a mechanism to directly address particular outcomes of concern, are often one of the first tools that regulators reach for in the performance-based regulation and regulatory reform toolkit. But on their own, they are insufficient to fully motivate desired utility behavior — and may represent a small portion of utility revenues absent a broader strategy for regulatory reform. There are a suite of foundational, systemic reforms that will reinforce the efficacy of PIMs focused on equity. Such complementary policies include:

• Performance-based regulation reforms are designed to encourage cost control and improve overall affordability, which will have the greatest benefit for multi-year rate plans with revenue caps to encourage cost efficiency, and other capital expenditure (capex) and operational expense (opex) equalization strategies, such as opex capitalization and totex, to prevent capex bias. Other policies to encourage cost control may be targeted at specific types of costs, such as fuel cost pass-through reform, which can motivate utilities to manage their fuel costs more carefully and encourage utilities to switch more quickly to fuel-free technologies.
• Consider the extent to which PIMs meaningfully alter utility revenues and business incentives. More incremental approaches will layer PIMs on top of cost-of-service regulation, with small penalties for underperformance or bonuses for meeting a target. More comprehensive approaches will more explicitly tie the financial integrity of the utility, including its ability to earn a reasonable return on equity (ROE), to specific performance standards. Overinflated ROEs will undermine affordability for all customers, but most critically for energy-burdened customers. Moreover, the financial signal of approved PIMs will be dampened by improper cost of equity estimates.
• Low-income assistance programs and disconnection protections can directly target assistance to those customers struggling the most with paying bills. Such programs include low-income discount rates, which offer lower rates, often in tiers for customers based on income. Other protections include percentage of income payment programs and other arrearage management programs that reduce or forgive customer debts. Finally, seasonal protections or disconnection moratoria can help protect the most vulnerable customers. The COVID-19 pandemic demonstrated that such protections offer the most benefit in households with young children and people of color, reducing their need to forgo basic goods and healthcare costs.
• Use resource planning to target and prioritize underserved communities, which enables utilities to bring a broader set of considerations into procurement, such as minimizing harmful impacts or maximizing benefits for underserved communities, increasing supplier diversity, and promoting equitable stakeholder engagement.

Regulators focused on encouraging recognition and distributional equity may need to consider the range of these tools beyond PIMs, including those that encourage overall cost control and affordability, those which better target outcomes in underserved communities, and those that offer protections to customers experiencing energy poverty.

While they may move the needle, equity PIMs are not a silver bullet — and they should be paired with other reforms to support more robust progress toward desired equity outcomes. In general, states have adopted PIMs as one component of their strategies to improve equity, alongside procedural equity enhancements, cost control reforms, and energy assistance program development. New states considering equity PIMs would be wise to follow their lead.

Although the energy transition should improve health outcomes for everyone — especially frontline communities who live in close proximity to fossil fuel infrastructure — existing inequities in electric service could still worsen as the energy transition progresses, without reform. For example, increasing electricity demand from clean energy manufacturing, electrification, artificial intelligence, and data center growth is already driving projections of massive utility investment in new infrastructure. Without regulatory action to control and appropriately distribute the costs of these new investments, this load growth will disproportionately impact underserved communities, whose already high energy burdens will further increase.

Equity PIMs are one tool in the emergent regulatory toolkit to realign utility incentives with more equitable and affordable outcomes. So far, states have adopted PIMs and other performance mechanisms to mitigate poor reliability and affordability for underserved communities and to redistribute the benefits of new programs and investments. Considering the nascency of equity PIMs, there is a lot of room for exploration and new PIM development, and we will likely see new PIMs tied to different equity metrics in the coming years.

To stay updated on new developments and insights in the world of PIMs, sign up for the PIMs Database Newsletter. Feel free to forward it to other regulatory, advocate, and utility stakeholders interested in PIMs and regulatory reform.

Additional review and editorial support provided by Sophie Watterson (Advanced Energy United) and RMI colleagues Ben Proffer and Gennelle Wilson.

[1] The New York Climate Leadership and Community Protection Act established a requirement that at least 35% of climate action benefits are directed to disadvantaged communities (Senate Bill 6599: New York state climate leadership and community protection act, July 18, 2019, https://www.nysenate.gov/legislation/bills/2019/S6599). Massachusetts climate legislation adopted in 2021 establishes protections for environmental justice communities in the clean energy transition (Bill S.9.: An Act creating a next-generation roadmap for Massachusetts climate policy, March 26, 2021, https://malegislature.gov/bills/192/S9.

[2] For example, the Hawaii PUC stipulated in the order adopting its Interconnection Approval PIM that the mechanism would be revisited after two years of performance (Decision & Order No. 37787, Docket No. 2018-0088, https://hpuc.my.site.com/cdms/s/puc-case/a2G8z0000007fLQEAY/pc21581?tabset-a3299=3). After the second year of performance data became available, the PUC evaluated the utility’s performance and determined that the PIM should remain in place for another year (Order No. 40462, Docket No. 2018-0088, https://hpuc.my.site.com/cdms/s/puc-case/a2G8z0000007fLQEAY/pc21581?tabset-a3299=3). While not an equity PIM, the Interconnection Approval PIM evaluation process may prove instructive for regulators overseeing equity PIM implementation.

[3] The Hawaii Public Utilities Commission stated that it is premature to attach financial incentives to the adopted reporting metrics due to the nascency of these metrics, but that these metrics may serve as the basis for future PIM development (Decision and Order No. 37507, Docket No. 2018-0088, https://puc.hawaii.gov/wp-content/uploads/2020/12/2018-0088.PBR_.Phase-2-DO.Final_.mk_.12-22-2020.E-FILED.pdf). The Illinois State Legislature directed the commission to adopt reporting metrics to collect and monitor relevant data on utility performance, which can then support the adoption of PIMs (Climate and Equitable Jobs Act, Sec. 16-108.18. Performance-based ratemaking, https://www.ilga.gov/legislation/ilcs/fulltext.asp?DocName=022000050K16-108.18)