Energy Finance Programs Need Sustainable Bolts
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.
