Ann Arbor, Michigan's 'Sustainable Energy Utility' Approved by Voters, What's Next?

When electrical engineer Johanna Mathieu first heard about Ann Arbor, Michigan's plan to create a "Sustainable Energy Utility" (SEU), she thought the idea was "crazy." Although investor-owned utility DTE Energy already powers the city, Ann Arbor wanted to establish a supplemental utility that would initially focus on installing rooftop solar and battery storage systems on homes, businesses, and other institutions throughout the city. Ultimately, the plan calls for building microgrids that would allow these buildings to share renewable energy across property boundaries, supplementing the existing transmission lines in the city.

Mathieu, an associate professor of electrical engineering and computer science at the University of Michigan, said the idea of duplicating grid infrastructure goes against the most basic principles she teaches her students. "The first lesson in grid basics is don't build duplicate infrastructure because it doesn't scale," Mathieu said. "That infrastructure should be owned and operated by a single company that is heavily regulated by the state or federal government."

However, Ann Arbor voters thought the SEU made sense: on November 5, 79% of voters approved a ballot measure authorizing the city to establish, build, operate, and own this new utility. The SEU aims to begin operations within the next two years, with the goal of accelerating local clean energy generation and improving the community's resilience of electricity supply.

The SEU's initial operating model

How will the SEU operate at launch? According to Missy Stults, Ann Arbor's director of sustainability and innovation, the SEU will pay the full upfront costs of installing rooftop solar and battery storage systems for homes, businesses, and institutions that choose to participate. The SEU will permanently own and operate these systems and will recoup its investment over time by charging customers for the electricity generated by their rooftop solar. When enough neighboring customers sign up for the SEU, the city hopes to build microgrids that allow them to share renewable energy. This infrastructure will also enable SEU customers to keep their power on during outages on DTE's main grid.

Additionally, the SEU will offer programs to help customers pay for energy efficiency improvements, home insulation, and electrification retrofits. It may also operate community solar projects that use solar power generated in shared city spaces, and build geothermal heat pump network systems to heat and cool communities without burning fossil fuels.

What distinguishes the SEU from a standard municipal utility is that it not only invests in local clean energy generation and decarbonization, but it does not seek to completely replace the existing utility. It aims to supplement the existing utility, providing Ann Arbor residents with more energy choices. SEU customers will receive separate bills from the SEU and DTE, paying separately for the energy each supplies.

As the SEU adds more local clean energy, the community's demand for DTE electricity may decrease. However, a 2023 report prepared for the city noted that the SEU is unlikely to completely replace DTE in the foreseeable future. Stults said in an email that models show the SEU could potentially provide more than 75% of the community's total energy needs in the future, but this outcome is unlikely to be achieved "for a very, very long time" because "we would need nearly the entire city to sign up to reach that threshold."

Workers install solar panels on the roof of a home in Washington state. Ann Arbor's SEU will initially focus on installing rooftop solar and battery storage on homes, businesses, and other institutions throughout the city.

Mathieu no longer thinks the SEU is a crazy idea, and she is now working with the city as a researcher. Although the SEU may not be the most technically elegant model for energy infrastructure, she said it is the city's best option for rapidly scaling up clean energy generation. Other paths, such as getting the existing utility to transition to clean energy faster or taking it over through municipalization, are not realistic. "I've explained to people, 'This is the fifth-best solution, but the first through fourth options aren't feasible for various reasons,'" Mathieu said. "The fifth option works, so let's do it."

Seeking more control

The passage of the SEU ballot measure is a pivotal moment in Ann Arbor's years-long effort to gain more control over its electricity sources. The city's climate goals include using 100% renewable energy citywide by 2030. Some community members had pushed for the city to acquire and take over the existing utility infrastructure through municipalization, but that could take years and cost Ann Arbor over $1 billion. Municipalization efforts often face strong opposition from existing utilities, although they can give communities leverage to persuade utilities to make concessions, such as lower rates or clean energy commitments.

Others in Ann Arbor advocated for Michigan to allow local governments to participate in community choice aggregation, where cities purchase renewable energy on behalf of residents while the existing utility continues to manage billing and distribution. State legislators have not yet passed such laws, and according to a FAQ document produced by the city, this could face "strong opposition" from existing utilities.

In 2021, "the idea came up: 'Can we create a supplemental utility without focusing on taking over?'" Stults said. "Because honestly... the goal isn't to own the system, it's to produce clean, reliable, affordable electricity." Stults assembled a small advisory working group of experts, who determined that the SEU was technically and economically feasible and compliant with Michigan law.

In some ways, Ann Arbor is following in the footsteps of Delaware and Washington, D.C., which have had versions of SEUs for years, but Stults said these differ from Ann Arbor's plan. For example, Delaware's SEU is a nonprofit organization that offers numerous programs to help homes, businesses, nonprofits, and farmers access renewable energy and make energy efficiency upgrades, but it does not operate microgrids, according to John Byrne, president of the Foundation for Renewable Energy and Environment, who created the model for Delaware's SEU.

How to launch the SEU

Creating a new utility requires startup costs, such as hiring a director and establishing a billing system, Stults said. To avoid passing these costs on to a few initial customers, the city will wait until the waiting list of potential subscribers reaches a demand of 20 megawatts per year before launching the SEU. Reaching the 20-megawatt threshold could require one or two large institutional partners or a thousand individual residents, Stults said. The city has been in talks with the public school system and other institutions about joining the SEU, and Stults expects a significant number of institutions to join.

However, the situation would be different if Ann Arbor receives grant funding rather than fully funding the SEU through debt. Stults said that with grants, the SEU would need less demand to ensure low rates for initial subscribers. She is also in discussions with venture capitalists about investing in the SEU, and the city is budgeting $250,000 to $300,000 from existing funds to hire the new utility's director.

The city began promoting the SEU's waiting list in October, and as of December 4, it had more than 650 names, Stults said, but she doesn't yet know the exact demand this represents or whether these are individual homes, businesses, or institutions. Information collection may begin in 2025. The SEU's final electricity rates will be "significantly impacted by enrollment numbers and financing methods," according to the city. Stults said the SEU may always be able to offer customers lower rates than DTE, partly because the SEU doesn't need to generate profits for shareholders and can access low-cost capital given the city's AAA municipal credit rating.

Customers can join or leave the SEU at any time, but if they leave, the city will remove the infrastructure it owns, Stults said. The costs of removing this infrastructure, as well as equipment depreciation and replacement costs, will be factored into rates.

Missy Stults, Ann Arbor's director of sustainability and innovation, talks about the SEU on the public access television show "Green Light," which aired on August 14, 2024, and is produced by the city's Office of Sustainability and Innovation.

The SEU's reliance on public participation is why the city put it on the November 5 ballot, even though it could have moved forward with the plan without voter approval. "Starting your own utility, even a supplemental, opt-in utility, is a big deal," Stults said. "This is the best way we could think of to confirm whether the public is truly interested in this, even those who would never subscribe. Do they want more choices in the system?"

Stults said the SEU has not faced any organized opposition, although she has encountered misunderstandings about what it is and isn't. Residents who support fully replacing DTE with a municipal electric utility see the SEU as a step in the right direction, but "not enough to meet the city's 2030 renewable energy goals or address our chronically unreliable grid," Greg Woodring, president of Ann Arbor for Public Power, said in a statement.

The key to the SEU's long-term success lies in community members feeling they have a stake in its development, said Byrne, who worked on Delaware's SEU. "The question is, if you're inside the government, is it really the community that governs, or is it the bureaucracy?" he asked. He advised Ann Arbor to "keep this entity closely connected to the community."

DTE Energy, the investor-owned utility serving Ann Arbor, said in a statement to Smart Cities Dive that it is "committed to supporting the City of Ann Arbor's clean energy goals." DTE compared the SEU to its MIGreenPower program, through which customers can pay to support clean energy. "When combined with clean energy investments from DTE programs, these voluntary, fee-based programs help accelerate economy-wide decarbonization while maintaining reliability and affordability," DTE said.

A model for other cities?

Could Ann Arbor's SEU model work in other U.S. cities? "From an engineering perspective? From a social, economic perspective? Absolutely," Mathieu said. "From a legal and regulatory perspective, I think it depends on the laws of that state or jurisdiction." But she added, "We can try it in one city and learn a lot, and then see if it makes sense elsewhere. I don't think we lose much by trying."

One challenge is convincing people who review federal funding applications that this is an idea worth betting on, Mathieu said. "When our applications are reviewed by other engineers who haven't been guided to think this way, they say, 'No, this is crazy,'" she said. "If we can overcome the barrier of people thinking 'things have always been this way, so they should always be this way,' we can move faster."

Byrne explained that these existing "rules" for maintaining grid stability are rooted in its traditional orientation around large central power plants, but communities can reconsider these standards and instead adopt a new paradigm. "If you want renewable energy to grow faster, don't build on the same model that got you into the current situation, which is centralized fossil fuel and nuclear plants and very expensive large grids," he said. "Try to develop alternative infrastructure."