Industrial Rate Impacts on Electrification Projects in Illinois and Michigan

Electrification of low- to medium-temperature industrial process heat is one of the most promising and accessible pathways for manufacturers to increase competitiveness, improve efficiency, modernize facilities, and save energy in the near term. Electrification can also help states and utilities meet energy goals, manage energy sources, and reduce air pollution. Electric industrial heat pumps (IHPs), for example, can reduce energy use associated with generating industrial process heat by up to one-third (Rightor et al. 2022).

This white paper investigates how energy bills change as industrial facilities electrify operations, with a focus on two Midwestern states, Illinois and Michigan. We find that electrification increases energy costs across all the rate tariffs studied. As a result, we highlight the opportunity to (a) change or create rate structures, also known as tariffs, to support electrification, and (b) start programs that encourage flexible heating loads in industry.

Midwestern utility regulators, rate developers, and program designers can turn to multiple sources for best practices, as we explore in this paper. First, they can look outside of the Midwest for design ideas for the industrial sector, such as BC Hydro’s “clean energy” rate that offered incentives covering energy and demand charges over a seven-year lifetime. Second, they can turn to other sectors for ideas on more nuanced time-of-use or coincident peak rates. These rates incentivize more flexible demand, including energy storage or behind-the-meter generation to build flexible capacity. Third, they can develop special electrification rates that are based on separate meters for incremental new electrified demand; the goal is to reduce the impact of demand charges while still meeting cost-of-service requirements. Finally, they can partner with state policymakers to develop tax credits or granting programs that can offset financial burden for electrifying manufacturing facilities and help to overcome larger spark gaps (the price differential between average electricity and gas prices at the facility).

As industry electrifies, traditional cost allocation runs the risk of shifting a disproportionate burden onto early adopters. Utilities should not necessarily be required to subsidize electrification or provide discounts, but electrifying facilities should not be penalized by legacy rate designs that were never intended for new, large loads (DOE 2025). Fair allocation would mean aligning charges with the costs customers actually impose on the system and using targeted tools to incentivize decarbonization where it makes sense. Electrifying industrials should not have to pay more because tariffs were designed without these factors in mind.