ShoreBank Blog

Unearthing a Linnaean Taxonomy for Energy Finance Programs

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:

1. 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.
2. “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:
   1. 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.
   2. 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.”
   3. 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.
3. 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:
   1. 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.
   2. Because these financial intermediaries are small, the programs will not be able to expand appreciably without new types of secondary markets being developed.
   3. 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 »

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.

Tags: green banking, on-bill financing, Property Assessed Clean Energy, ShoreBank, triple bottom line
Posted in Green Collar | 3 Comments »