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Posts Tagged ‘on-bill financing’
Tuesday, August 17th, 2010
As the number and diversity of energy finance programs expands, cataloguing these efforts and evaluating how differences in program design influence success is critical. Last month, I participated in a discussion about energy finance at the National Association of Regulatory Utility Commissioners (NARUC) conference that attempted to begin this challenging task.
Among the key points emphasized in the discussion:
- Finance is just a piece of the puzzle: All of the participants emphasized that while finance is a helpful (and perhaps necessary) element of an energy efficiency program, offering flexible (and even very cheap) financing cannot ensure success, nor even broad participation. Contractor engagement, effective marketing, and making the process simple for the consumer are even more important than flexible financing.
- “On-bill financing” is an amalgam of many different types of utility led lending programs. “On-bill finance” programs vary considerably and few have explored the differences in a meaningful way:
- A key element is whether the utility is extending credit to the end-user (this variation is “on-bill finance”), or whether the utility is merely collecting payments on loans extended by another entity. The latter is termed “on-bill repayment” since the utility assumes no credit risk.
- Most programs do not allow the loan to remain with the meter, should ownership change. Instead, the loan must be repaid in full if the account is closed, such as when a home is sold or a renter vacates. Programs that do allow transferability are termed “on-bill tariffs.”
- Other key elements of on-bill programs are how partial payments are divided; whether the utility can/will cut-off service if the loan is not repaid; and what type of collateral will be taken to secure the loans.
- Banks, credit unions, and nonprofits are critical to partners for energy finance programs at the moment. Given the current impasse on expanding Property Assessed Clean Energy (PACE) programs due to objections raised by the Federal Housing Finance Agency (FHFA), energy finance programs in the interim will be led by private and nonprofit lenders:
- In nearly all cases, small, community-based financial institutions, rather than the large commercial banks, are providing the financing for these programs. Consequently, program designs vary significantly across the country, with pricing, terms, and subsidy usage differing markedly.
- Because these financial intermediaries are small, the programs will not be able to expand appreciably without new types of secondary markets being developed.
- While the federal government is attempting to develop national templates for these programs and the amount of leverage that should be obtained for every dollar of subsidy, creating such standards will be difficult due to the differences in the risk appetite and availability of capital in each local market.
The conversation again highlighted the fact that while energy finance industry is expanding and evolving, the industry is still in its infancy. With so many different models being developed, understanding best practices in program design is critical. Thankfully, experts, such as at Lawrence Berkeley National Laboratory and elsewhere, are beginning to explore the differences and better understand the key drivers of success. Personally, I look forward to seeing the clever Latin names that get assigned to the new species of lending programs radiating across the globe.
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Tags: energy finance, on-bill financing, Property Assessed Clean Energy
Posted in Green Collar | 1 Comment »
Tuesday, May 18th, 2010
While clearly lacking the drama, athleticism, and chiseled bodies of a World Wrestling Federation grudge match, there is an interesting battle brewing within energy finance over which financing model is best suited to carry the country forward. One could almost imagine what the WWE’s clever CEO, Vince McMahon, might orchestrate if he were running the Energy Finance Federation (EFF) given the unfolding story line of old vs. new, stodgy vs. innovative, time tested vs. up-and-coming.
The scene might look something like this:
It’s Saturday night and the crowd is electric. Fans are divided into two camps, with signs and clothing pointing to their allegiances. Already in the ring is the cagy veteran, a Hulk Hogan type. Befitting his largely Midwestern roots, he’s reliable and pragmatic; a survivor who has attracted countless fans to arenas before anybody cared about the “sport.” Old-timers show their support with signs ranging from “Let’s Go On-bill” to “You’re the original energy loan product – who cares if you look like other consumer loans.”
But, for McMahon and his backers, this local hero doesn’t seem capable of bringing about the meteoric rise needed to catapult energy finance to the next level and to help the sport reach a national audience. The veteran doesn’t have the connections to secondary markets, deep enough pockets, or the necessary charisma.
Suddenly, there is a jolt of excitement. The lights dim; the music blasts. Fans rise to their feet to get a glimpse of the wrestler who’s the talk of every town. Sweeping into the arena is the rapidly ascending young gun, the darling of the masses, full of exuberance and moxie one would expect from this up and comer. He’s definitely flamboyant, and, with his venture partners, has existing connections to debt markets, and scalability. The announcer roars, “In this corner, hailing from Berkeley, CA and wearing the red trunks, it’s Property Assessed Clean Energy McGee” – known by all his fans as “Fast PACE.”
The bell sounds and wrestling commences. True to his name, Fast PACE rushes out and begins the assault. The veteran is stunned by his quickness and Fast PACE seems to be gaining the upper hand early in the match. But, don’t count out the veteran. He lands a right, which drops Fast PACE to the mat. The veteran pulls the newbie to the ropes by his hair. The referee quickly intervenes, but while the ref and the veteran argue, the ref doesn’t notice what’s going on behind him. Unbeknownst to the referee, there are two other wrestlers sneaking into the ring – it’s Fast PACE’s arch enemies, Fannie and Freddie, a.k.a. the Mac twins. They are the behemoths of the EFF and are particularly uncomfortable with the public attention the young star is enjoying. The tag team jumps on the newcomer. He’s dazed. The ref turns and sees what’s transpiring. He ends the match…it’s a draw. Calls for a rematch immediately erupt; emotions are stirred; lines become further entrenched.
McMahon is pleased with the results – record ratings, new fans, and media buzz. He knows the world needs both wrestlers right now, even if the fans want a winner. He recognizes that each wrestler has his place, his particular base of support, his pros and cons. McMahon also understands that there isn’t enough data to discern which wrestler will ultimately find favor with the large financial investors McMahon needs for growth. So, he keeps the grudge going, hoping it will lead to a larger following for the sport overall, and lets each wrestler find his place among the fans.
Want to learn more about the bout over energy finance and green banking? Visit ShoreBank at Green Festival Chicago May 22-23. Contact us to see if you are eligible for a VIP Green Festival Chicago package.
Tags: energy finance, on-bill financing, PACE
Posted in Green Collar | 1 Comment »
Tuesday, March 30th, 2010
At a time when credit is so tight, it is commendable that many local and state governments are using stimulus funds to create new financing options to help homeowners and businesses pay for the upfront costs of energy saving measures. One problem is that most of these loan funds are quite small. Indeed, among the largest is a $30 million pool established by the State of Ohio – a state with 11 million people and a GDP of $466 billion. The vast majority of the pools have less than $10 million in capital. That amount only provides a drop in the bucket of what our economy needs. Even a conservative estimate suggests that hundreds of billions are needed for energy makeovers at the local level.
One solution is to create a secondary market – a mechanism by which the loan funds can sell the initial loans to another party and obtain the cash needed to make new loans. The buyer of the loans, then, will be entitled to the payments that will come in slowly over time.
One challenge to the development of this secondary market is that each governmental entity was free to develop its own program guidelines and rules. Consequently, each loan program is likely to have idiosyncratic underwriting policies, pricing structures, and loan terms. But secondary markets like conformity; therefore, aggregating these disparate loans into pools to sell to investors will be extremely difficult.
The Department of Energy (DOE) is working feverishly to develop a secondary market for some types of loans, most notably, unsecured loans to homeowners. It is unclear if similar efforts are underway for other types of borrowers, such as multi-family rental properties or commercial buildings.
I, however, believe DOE should consider seeding an intermediary that can purchase all of these loans (likely at a discount, since many carry below market interest rates) to allow the funds to recycle more quickly at the local level. This intermediary also could set standards, ensure more consistency and conformity, and better leverage this large, initial investment. Doing so would allow capital to flow into new projects, make development of a secondary market easier, and help ensure that stimulus funds benefit more American families and provide a bigger boost to local economies.
What do you think?
Tags: buy local, energy conservation loans, energy efficiency, energy finance, on-bill financing
Posted in Green Collar | No Comments »
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 | 1 Comment »
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 »
