ShoreBank Blog
The ShoreBank Blog is your place to find ShoreBank news, new product information, and our insight into the banking world.
Posts Tagged ‘on-bill financing’
Tuesday, March 9th, 2010
One would assume that energy lending is suffering. Lenders are not only lending less, but actually reducing average balances on credit cards, home equity loans, and lines of credit. In fact, the contrary is true – energy lending seems to be growing by leaps and bounds. Many people ask me why I believe energy finance is poised for explosive growth.
Here are my five reasons for this growth:
- As credit is so difficult to obtain for any kind of project, the federal government is extremely focused on creating new loan programs, like energy finance, that expand credit in all sectors.
- The credit crunch is forcing many in the energy efficiency community to reach out to new types of partners to create these loan programs. In the past, the efficiency community concentrated on developing partnerships with very large commercial banks for easier replication and escalation. The problem is that pilots require experimentation, a willingness to develop new processes and procedures, and, often, an assumption of added risk – elements that do not easily mesh with these large banks’ established lending platforms, especially for lending products, such as residential mortgages, that highly value routinization, efficiency, and standardization. The credit crunch has meant that smaller, mission-driven institutions, which are eager to pioneer new types of loan structures and quite adept at pulling in philanthropic partners to leverage public dollars, such as our colleagues in Portland, are now courted more routinely as partners.
An increasing number of states are legislatively mandating that utilities create on-bill financing mechanisms. As a result, utilities are being thrust into the finance business. Consequently, they are now more eager to develop partnerships, explore leveraging models, use their expertise in measurement and verification of savings, and, with contractor oversight, to develop effective energy lending programs.- The severe economic downturn, budgetary shortfalls at all levels of government, and growing discontent with government (and elected officials), puts a premium on programs that promote job growth, are revenue neutral, and are open to a wide swath of the electorate. Energy financing programs are among the few policy options that offer all of these elements.
- The extreme run up in energy prices in 2007 and 2008 has altered perspectives on where future energy prices are headed. Most people now believe that energy prices will rise over time and that escalation will greatly outpace overall inflation. Indeed, rising costs for energy, like death and taxes, is now seen as one of the few certainties in life.
All of these reasons have thrust energy finance into the national spotlight and to much higher prominence in the financial services industry, especially if the Department of Energy is successful in its efforts to create a new secondary market for loans tied to residential energy efficiency improvements. Naysayers look out: energy finance is poised for growth.
Tags: energy efficiency, energy finance, financial crisis, on-bill financing, ShoreBank, triple bottom line
Posted in Green Collar | No Comments »
Tuesday, February 9th, 2010
Energy finance is clearly a hot topic if a panel on the subject at the Midwest Energy Efficiency Alliance annual conference has an overflow crowd. In years past, the topic might have garnered a couple of dozen of attendees and not the capacity crowd seen last month.
Panelists who were representing a wide array of energy efficiency financing models – from Property Assessed Clean Energy programs (PACE), to on-bill financing options, to governmentally supported private and public financing efforts – illuminated similarities among the programs. These similarities offer the following important lessons for financing programs targeting the residential sector:
1. No model fits all areas. Because no one financing option is perfectly suited for all geographies, incomes, and housing types, a variety models is needed. For instance, although the PACE model is likely to prove quite helpful for many localities, this model may not be feasible for a municipality with elevated levels of foreclosure or a very low tax base, or for one teetering on bankruptcy. Likewise, an on-bill financing program that relies solely upon a utility’s coffers to fund the loans may have too small a capital base to cover a meaningful portion of the units in the utility’s territory. This problem is particularly acute for dense urban areas, such as Chicago, where the capital need is conservatively estimated to be in the billions.
2. Tie the financing to the property or meter. If utility savings are the source of repayment of the loan, the financing should be tied to the property or meter. Otherwise, depending upon the timing of the sale or move, the savings could fall well short of what is needed for repayment, leaving the homeowner or renter to fund the difference. However, equally important, if the financing remains in place after the initial owner or tenant leaves, the improvements should be limited to ones that are not easily removed, such as air-sealing, insulation, HVAC systems, and windows, which will continue to generate savings well after the original owner departs.
3. New sources of liquidity are entering the field. Development Finance Organizations (DFOs), in particular, could represent an important new source of liquidity for energy finance programs. DFOs are public finance entities capable of issuing bonds to support public purpose projects. A development finance entity, for instance, could potentially issue bonds to provide the capital for an on-bill financing program, thereby lessening the need for the utility to find the funds internally or to have to borrow them directly.
As the number of energy finance pilots grows and diversity of program types multiplies, there is an acute need for dialogue among the practitioners about lessons learned, limitations for other locales, and opportunities for collaboration. I applaud the Midwest Energy Efficiency Alliance for beginning this critical conversation.
Tags: energy finance, green banking, Midwest Energy Efficiency Alliance, on-bill financing, ShoreBank, triple bottom line
Posted in Green Collar | No Comments »
Tuesday, January 12th, 2010
One prediction for 2010 is that this year will be seen as a defining time for a new industry – the energy finance “industry.” Through the creation of Property Assessed Clean Energy (PACE) programs, the launch of on-bill financing initiatives, and the development of numerous other types of energy lending offerings, an unprecedented number of new financing options for energy efficiency and alternative energy projects will enter the marketplace.
As I have mentioned previously, most of these new options will by developed and managed by institutions well outside of the formal banking sector. Because most of these new programs involve some type of statutory authorization, more often than not, program design and implementation fall to folks far afield from the financial sector, such as Commerce Commission staff, City Councils, and legislative staff on State Energy Committees.
One consequence is that some basic tenets of lending may not be well articulated in the program designs, statutes, and implementation plans. I will concentrate on four elements that I see as most critical to the energy finance programs and which are often misunderstood:
1. Credit Risk: A fundamental part of any lending program is the borrowers’ capacity and likelihood to repay the debt. In most cases, varying types of borrowers can present different credit risks – a homeowner, for instance, offers very different risk profile than a small business borrower. Groupings that overlook these distinctions can present problems later on as the financing programs attempt to locate the cash needed to fund the loans.
2. Liquidity: Financing programs involve providing cash to pay the upfront costs to install energy saving (or energy producing) measures. The cash has to come from somewhere – ARRA funds, utility borrowings, municipal coffers, banks, CDFIs, the credit markets, etc. In many cases, the initial funds may be quite limited, so the sources of cash are very likely to change as the program scales up. Understanding how these funds are to be obtained throughout the program’s life is a critical feature of the program design. It’s also important to realize that any lending program of notable scale inevitably involves integration with the capital markets – where else will the billions in cash come from?
3. Demand: Even if borrowers with very low risk can be found and cash made available to them at advantageous terms, the targeted borrower still has to elect to borrow the funds (and install the energy saving measures). The notion that attractive capital will inevitably lead to demand for the loan product is highly questionable (see Marrion Fullers’ excellent synopsis of lending programs at http://www.sentech.org/energysummit/documents/3_Fuller_Summary.pdf).
4. Contractor Training and Certification: While financing programs are explicitly about delivering capital in the least costly and most flexible way, providing debt is not the primary purpose of these lending programs – the purpose is to deliver energy savings/production. Without trained and certified contractors and a mechanism for measurement and verification of the expected energy savings/ production, these financing programs cannot achieve their primary objective – even with full repayment of the loans.
Good programs, such as those developed by my colleagues in Portland, AFC First, Renewable Funding, and many others, have these elements front and center in their program design. Hopefully, other new entrants will follow their lead.
Tags: green banking, on-bill financing, Property Assessed Clean Energy, ShoreBank, triple bottom line
Posted in Green Collar | 3 Comments »
Tuesday, November 18th, 2008
An energy efficiency financing option receiving a significant amount of attention in policy discussions is “on-bill” financing. On-bill financing involves providing a utility-extending credit for various energy efficiency improvements, and then adding the ensuing loan payments to the beneficiaries’ utility bills. Proponents of the approach point to several benefits. For one, utilities already have elaborate billing systems, so transaction costs are limited – it’s just one more line item on an established customer’s bill. For another, there exists a notion that consumers are leery of having another bill to pay, so households may be more willing to undertake the improvements if the ensuing payments are simply added to an ongoing bill. Finally, there is a sentiment that customers will go out of their way to make payments if they are part of the household’s utility bill since failing to do so could result in “shut-offs” or cessation of utility service.
While I see potential value in the on-bill financing notion, I think we should critically examine the underlying rationale before moving too quickly to implement this concept.
Clearly, there is some validity to the notion that on-bill financing would have low transaction costs – especially for smaller projects, such as those costing less than $5,000. Yet, I am not convinced these costs are less manageable for other types of institutions, such as credit card companies, that routinely extend credit for even lower amounts.
Secondly, I am skeptical that very many efficiency projects have been derailed because of consumers’ concerns about having another bill to pay. With the average household possessing seven different credit cards, and with over-leveraged consumers being one of the key drivers of the current financial meltdown, it seems hard to imagine consumers running from any form of credit.
Most of all, however, I am reluctant to believe utilities will have lower losses than other lending institutions. If foreclosures are at record levels, utility payments must be faltering as well. Certainly, local press reports here in Chicago have indicated that shut-offs have risen dramatically at both the natural gas and electric utilities.
Given that utilities will charge all rate-payers for any losses that ensue, it would seem prudent to carefully analyze the risks and realities of the approach. My concern is that if on-bill financing is not implemented carefully, it could easily become a regressive tax on low income households that act responsibly and manage their financial obligations appropriately.
To ensure households have access to appropriate and responsible financing options for energy efficiency projects, ShoreBank continues to explore ways to use private capital to underwrite these critically important investments.
Tags: community development, energy conservation loans, green banking, green building, on-bill financing, ShoreBank, triple bottom line
Posted in Green Collar | 1 Comment »
