November 13, 2019

A New Paradigm for Utilities: Electrification of the Transportation and Heating Sectors

Ryan Hledik, Ahmad Faruqui, Jürgen Weiss, J. Michael Hagerty, and Long Lam

The tide has shifted in the electric power industry. Over the past several years, there has been a steady stream of coal plant closures, record-setting low prices for renewables and storage, and increasingly ambitious state and city carbon-reduction goals. More recently, electric utilities have taken a leading role in reducing carbon emissions. Xcel Energy set the course with its plan to reduce emissions by 80 percent in 2030 and 100 percent in 2050 over its entire eight-state service area. Duke Energy has announced a similar goal. But adapting the supply of electricity is just the first step toward a low-carbon future. The next step is likely to be the electrification of demand from sectors aiming to achieve similarly deep carbon reductions.

Electrification of the transportation and building heating sectors appears to be one of the most cost-effective approaches to decarbonizing the broader economy, and is a central focus for states that are setting deeper decarbonization targets. There are now more than one million electric vehicles (EVs) on the road in the United States, and the Edison Electric Institute (EEI) forecasts seven million by 2025. With a rapid increase in the availability of all-electric vehicle models expected in the next couple of years, and a number of manufacturers announcing commitments to transition entirely to electric models in the near future, the industry may be on the verge of an inflection point in EV adoption.

Of course, barriers to electrification remain, including lack of sufficient public EV charging infrastructure and limited consumer preferences for electric heating and cooking. But if these barriers are overcome, the implications of electrification-related load growth are significant for utilities. Our analysis of New England’s decarbonization goals found that achievement of those goals could double electricity demand by 2050, increasing the need for additional low-carbon generation resources to between 4 and 8 gigawatts per year. On a national level, full electrification of the heating and transportation sectors could increase electricity demand by 85 percent by 2050, requiring an additional $7 to $15 billion of transmission investment per year through 2050. As they have done in the recent shift to clean energy supply, electric utilities and energy regulators can take a proactive role in facilitating the transition to an electrified and decarbonized economy.

Recent State-Level Electrification Developments in the Transportation Sector

Some state utility commissions and utilities have identified the need to get ahead of the electrification trend and have sought to better understand its potential impact on the power system.

  • In California, Southern California Edison filed a proposal with the California Public Utilities Commission to expand its EV charging infrastructure pilot program, aiming to install 48,000 new charging stations over four years at a cost of $760 million.
  • In Florida, the Public Service Commission approved a five-year EV charging station pilot program for at least 530 vehicles with no more than $8 million of operating and maintenance expenses.
  • The Maryland Public Service Commission approved a five-year pilot program in January 2019 to install more than 5,000 public fast-charging EV stations across the state. Maryland utilities will establish a new rate class for the public charging stations, provide rebates to customers for the cost of chargers with advanced functionality installed in private residences, and develop a time-of-use rate design as part of their residential rebate offerings. 
  • The Public Utilities Commission of Nevada adopted a rule in May 2018 to allow NV Energy to develop vehicle charging stations and implement time-based rates, and to administer $15 million in incentives for third-party developers seeking to build charging infrastructure. 
  • In Oregon, Portland General Electric filed a proposal with the Oregon Public Utility Commission to create two pilot programs designed to help accelerate Oregon's transition to cleaner energy by encouraging the purchase and use of EVs. These proposals build on those adopted by the commission in February 2019 to encourage electrification. 
  • Pennsylvania’s Department of Environmental Protection published an EV Roadmap that outlines seven short-term strategies the state can pursue in the next two years to increase electric vehicle use, including creating a consumer education program, connecting with car dealers, establishing a statewide EV sales goal, and crafting new policies or legislation to encourage utilities to invest in transportation electrification. Commissions and state agencies in Connecticut, Missouri, Wisconsin, and Ohio have opened similar proceedings to understand the best path forward for transportation electrification.

These early steps are essential in better understanding the potential challenges and opportunities of electrification. Should the pace of electrification accelerate, regulatory frameworks for assessing the benefits and costs of electrification-related utility initiatives will quickly become essential.

A New Cost-Effectiveness Framework for Evaluating Electrification Initiatives

One of the impediments to greater utility engagement in electrification programs is the lack of a regulatory standard for analyzing their cost-effectiveness. Existing frameworks do not have sufficient depth and breadth to appropriately quantify the value of electrification. To help address this shortcoming, we worked with the Electric Power Research Institute (EPRI) to develop a cost-effectiveness framework suitable for comprehensively evaluating the costs and benefits of electrification initiatives.

For decades, utilities and regulators have relied on cost-effectiveness frameworks to analyze demand-side investment decisions (primarily for ratepayer-funded energy efficiency and demand response programs). The California Standard Practice Manual (SPM), published in 1983, has largely served as the authoritative manual on the subject. To establish a new cost-effectiveness framework for electrification, we reviewed existing frameworks, such as the SPM tests, and received input through in-depth interviews with a dozen experts on electrification and cost-effectiveness analysis. Overall, we found that the SPM tests, such as the Societal Cost Test, are useful for assessing electrification cost-effectiveness at a conceptual level. However, implementation of the SPM tests often falls short. Particularly in the context of electrification initiatives, interpretation of which benefits and costs to quantify and the choice of an appropriate discount rate are key considerations when evaluating cost-effectiveness.

To address the lack of a sufficient electrification cost-effectiveness test, The Brattle Group and EPRI propose a new approach: the Total Value Test (TVT). The TVT takes the broadest possible perspective on the costs and benefits of electrification programs, weighing environmental impacts and non-energy benefits against similarly important changes in energy resource costs and other benefits that may accrue directly to participants and/or non-participants. Notably, the TVT comprehensively accounts for all these possible sources of value, rather than taking a narrow perspective that may exclude important considerations.

The following are critical considerations when applying the TVT:

1.      Identifying costs and benefits. Rather than taking a narrow, sector-specific perspective, the TVT accounts for all energy resource costs, capital costs, environmental impacts, and non-energy benefits.

2.      Including non-energy costs and benefits. Non-energy benefits and market barrier costs will take on increasing importance in an electrification context. Where not readily quantifiable, they should be given careful qualitative consideration—particularly when evaluating measures that are marginally failing the relevant cost-effectiveness tests.

3.      Accounting for policy goals. To be useful for decision-making, the baseline scenario should reflect the costs and market dynamics associated with the achievement of established policy goals. A proposed electrification program can then be evaluated based on whether it increases or decreases costs and benefits under these conditions.

4.      Defining the TVT “boundary.” Utilities and state regulators may wish to define the boundaries of the TVT at the state or federal level depending on the context of the proposed investment. One practical application of drawing the boundary at the state level is allowing federal subsidies to be included as a cost reduction in the program.

5.      Near-term versus long-term costs and benefits. It is important to evaluate the cost-effectiveness of efficient electrification programs over a long-term study horizon. The benefits may also extend well beyond the life of the equipment directly associated with the program, such as public charging infrastructure that helps overcome range anxiety or programs that might drive down technology costs over time.

To demonstrate the application of the TVT, our report with EPRI considered three case studies: city bus electrification, indoor agriculture, and electric water heaters. Each provided insights into the value of the TVT relative to other cost-effectiveness approaches.

  • City bus electrification. This case study showed that the cost of electrifying a fleet of city busses would outweigh the benefits from the narrow perspective of a transit agency. However, benefits would outweigh costs when accounting for broader societal benefits included in the TVT. Compared to a net cost of $0.7 million from the perspective of a transit agency, the TVT estimated net savings of $5.7 million for the same scenario. The difference between these two values is a result of the TVT’s different treatment of fuel costs and the inclusion of emissions-based externalities and electrical system upgrade costs. 
  • Indoor agriculture. Analyzing the impacts of growing spinach on a traditional farm in California versus in a warehouse in Denver demonstrates the extent to which the benefits and costs of electrification can extend well beyond the energy sector. In this case, the electricity costs for the indoor farm were estimated to be offset by lower transportation, water, and land costs. Results are highly sensitive to the assumed efficiency of the indoor farm. Other non-energy benefits that the TVT could include in this case were reduced water demand, reduced fertilizer runoff, and increased food security. 
  • Electric water heaters. The load of electric water heaters can be managed in real time to facilitate the integration of intermittent renewable generation. The TVT accounts for this “load flexibility” value of electric water heaters, weighing it against other factors including natural gas prices, electricity costs, and greenhouse gas emission rates. Applying the TVT in this context, we estimated that in markets with moderate electricity costs and the highest flexibility value, grid-interactive electric resistance water heaters could be more beneficial than either gas water heaters or heat pump water heaters, despite their lower efficiency. This is likely to be the case in markets with highly decarbonized systems.

A Path Forward

Adopting a comprehensive framework for evaluating electrification cost-effectiveness will be a critical step forward as electric utilities and regulators transition to a decarbonized and electrified energy system. The TVT can serve as the cornerstone for an electrification strategy built around the following steps:

1.      Understand the near-term potential for electrification in the utility service territory and incorporate electrification projections into load forecasts. Developing a well-supported electrification projection will be crucial for justifying electrification-focused investments in a regulatory setting.

2.      Develop electrification programs that target the most cost-effective approaches to support adoption. To do so, utilities and regulators can consider EV-specific rates, public charging infrastructure deployment, and rebates for EVs or electric heat pumps to accelerate adoption.

3.      Review rate structure in the context of electrification loads to determine whether new rates and/or rate classes are needed, to avoid unexpected charges for early adopters, to promote off-peak electricity use, and to minimize unintended cross-subsidies.

4.      Once utility commissions have approved these new programs, develop pilot studies to learn from the initial investments and identify the necessary information for supporting future expansions of the programs.

If the barriers to electrification are overcome, deep decarbonization goals and the related consumer adoption of electric end-uses could contribute to rapidly accelerated electricity load growth. This places emphasis on the critical, near-term need to develop the capability to foresee and evaluate related beneficial utility investments.

    Ryan Hledik, Ahmad Faruqui, Jürgen Weiss, J. Michael Hagerty, and Long Lam

    Ryan Hledik is a Principal in Brattle’s San Francisco office, specializing in regulatory and planning matters related to emerging energy technologies. He received his M.S. in Management Science and Engineering from Stanford University, and his B.S. in Applied Science from the University of Pennsylvania.


    Ahmad Faruqui is a Principal in Brattle’s San Francisco office, specializing in energy issues involving the customer. He received his Ph. D. in economics from the University of California, Davis.


    Jurgen Weiss is a Principal in Brattle’s Boston office, specializing in issues broadly motivated by climate change concerns. He received his Ph.D. in business economics from Harvard University, his MBA from Columbia University, and his B.A. from the European Partnership of Business Schools.


    J. Michael Hagerty is a Senior Associate in Brattle’s Washington, D.C. office, specializing in electrification, transmission planning, and wholesale market design. He received his M.S. in Technology and Policy from the Massachusetts Institute of Technology, and his B.S. in Chemical Engineering from the University of Notre Dame.


    Long Lam is an Associate in Brattle’s Washington, D.C. office. He received his Ph.D. in Engineering and Public Policy from Carnegie Mellon University, and his B.S. in Mechanical Engineering from the Massachusetts Institute of Technology.