Financing Residential and Commercial EE
Introduction
This White Paper is aimed at local government officials and others who are interested in establishing financing programs as part of energy
efficiency (EE) upgrade programs serving residential and small commercial customers. It complements another White Paper, ______, reviewing
EE programs in general. It first provides an overview of financing’s goals in the context of EE upgrade programs, the elements that constitute
financing initiatives. It then provides a broad overview of various financing tools. It then delves deeply into three financing tools:
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On-bill financing payment mechanisms.
Property Assessed Clean Energy (PACE) financing with a junior lien.
Existing Federal financing tools, particularly FHA’s PowerSavers and Fannie Mae’s Energy Loan Program, which can be adopted by local
lending institutions and promoted at the local level.
This paper provides strategic guidance for local governments and others considering implementing these tools.
Goals of financing
Financing plays an important role in energy efficiency programs. Many building owners are wary of spending savings on energy improvements,
or lack expendable capital entirely – in the residential sector energy improvements typically cost $5,000 to $15,000 per home. Financing
eliminates the up-front financial burdens on owners who undertake energy efficiency improvements to their buildings. Repayments are then
made over time with money that would otherwise have been spent on energy.
Peter Krajsa, Chairman and CEOAFC First Financial Corp.
pkrajsa@afcfirst.com
Contractor-Driven Energy Efficiency Loan Programs. Ppt Presentation.
http://www1.eere.energy.gov/wip/solutioncenter/pdfs/Driving_Demand-Working_With_and_Learning_from_Contractors_Presentation.pdf
Pennsylvania’s Keystone HELP (PA Treasury, DEP) Over 7,000 loans and $58 million in energy efficiency loans -enhanced by Philadelphia Better
Building Award
•Connecticut Solar Lease(Connecticut Clean Energy Fund) Over $40 million in residential solar leases
•Connecticut Energy Efficiency Fund (HES) Program
•Kentucky Home Performanceenhanced by Greater Cincinnati Better Building Award
•Programs with Duke Energy, Progress Energy, National Grid, CL&P, Yankee Gas, Energy Kinetics, Energy Kinetics, Gorell Windows
70% of all Home Improvements up to $15,000 are financed in one way or another, 90% of improvements greater than $15,000 are financed
Elements of financing
Characteristics of Financing Mechanisms
Those implementing energy efficiency programs must balance creating an attractive financing package for customers with the programs’
financial sustainability and administrative ease. The following considerations are especially important, as financing programs are developed:
(Issue Categories?)
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1
Title of Issue
Issue Description
How to address
Residential vs. Commercial - Residential customers may need longer financing terms than commercial clients to make financed energy
efficiency upgrades attractive. While substantial energy savings potential exists in all sectors and conditions vary from building to
building, generally common retrofit measures in the residential sector have longer pay-back periods than the commercial sector.
Accessibility - Homeowners vary in their access to capital and creditworthiness. Providing financing packages as part of energy efficiency
programs is especially important for customers with little expendable resources to put towards energy efficiency, and those with poor
credit1. Unfortunately, many existing programs’ financing terms make financing inaccessible to such demographics. Typically, lenders will
specify minimal creditworthiness scores for a homeowner to be eligible for a program, often measured using a FICO score2, debt-toincome ratio, utility payment history, and other criteria. Organizations establishing and improving their energy efficiency programs
should work to develop financing solutions accessible to the widest possible segment of their customer base – while ensuring their
Merrian Fuller. 2009. Clean Energy Municipal Financing. UC Berkeley. http://piee.stanford.edu/cgi-bin/docs/behavior/becc/2008/presentations/19-6A-02The_City_of_Berkeleys_Clean_Energy_Municipal_Financing_Program.pdf
2
Fair Isaacs Corporation. 2010. Credit Risk Scores. Accessed January 12, 2011. http://www.fico.com/en/Products/Scoring/Pages/default.aspx
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3
programs’ financial security and long-term viability. Of course, financing does not only serve those with few capital resources and/or
little independent access to credit for home improvements; it may be attractive to many middle and upper income earners as well.
Underwriting criteria, approval rates, and security – Programs should aim for having as many customers approved as possible. Early
indication of approval rates – 50-60%
o Michigan Saves – 50% approval (early going, probably should cite) (Brown 2010). 640 FICO score – 50% of population qualifies?
o NYSERDA Green Jobs Green NY – 61% approval (Pitkin 2011)
Affordability – Energy improvement customers want low interest rates. EE programs may offer lower rates as an incentive for more
comprehensive energy retrofits – Pennsylvania’s Keystone HELP program used this approach3. All else being equal, lower rates can be
provided through:
o Securitization – This can involve placing a lien on the property. Or in the case of on-bill financing, it may involve the consequence
of utility service termination if payments are not met. Customers may be wary of such recourse. Additionally, recent guidance by
Fannie Mae and Freddie Mac has effectively halted senior liens on property for the time being (see below in PACE programs).
o Credit enhancement – Using program dollars to leverage outside money through loan guarantees, interest rate buy-downs, loan
loss reserves, loan insurance, etc.
Tie payment to home/meter – Homeowners may be wary of accruing private debt, when they may sell or rent their space.
Turn-around time – Customers have little time to spare for energy improvements. The quicker and more easily financing mechanisms
can be established, the better.
Ease of administration – Financing can be time and resource intensive to implement. Programs in the early stages of development
and/or minimal resources may not be able to establish tailored financing tools. In such cases, these programs may facilitate customers’
adoption of simple, pre-existing financing mechanisms offered by outside institutions. Likewise, debt servicing must be manageable for
program operators.
Repayment obligations – for on-bill financing in case of move/fire
Customer cash flow – Programs may aim for customers to experience a positive or neutral cash flow after retrofits – that is, financing
payments will be less than utility bill savings. EE programs can be designed to meet such principles, incorporating such parameters into
energy upgrade decision making software software. However, consumers may not experience savings due to changing consumer
behavior (such as higher thermostat set points or new electronic equipment), changes in the weather, or inadequate retrofit quality.
Providing strong quality assurance regimes and incorporating behavior change components into programs are means of reducing the
Peter Krasja. 2010. State Incentived Consumer Financing Programs. Accessed January 16, 2010 http://www.cleanenergystates.org/Presentations/CESA_EPCAFC_1.22.10.pdf
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likelihood of negative cash flow. Programs should also establish policies applying to customers who are unhappy with their energy
savings and financing.
Seniority in case of partial payments – For on-bill financing4
Consumer Attitudes Toward Financing
Consumers are wary of financing programs. Especially for residential customers performing medium scale retrofits (perhaps $5,000-15,000),
financing must be simple and seamlessly accessible (Brown 2010; Fuller 2009). Otherwise, many customers will not be interested.
Prominent Funding and Financing Opportunities
The elements of financing description above illustrates that there are theoretically a great many combinations of different elements that can
comprise an EE financing program. In practice, a narrower (though still multitudinous!) range of financing tools have been developed nationally.
The following table describes many of these tools. It focuses predominantly on tools used in the residential and small commercial sectors;
various other tools, such as Energy Service Contracting, have gained greater penetration in the larger commercial and industrial sectos.
Financing
Tools
Description
Benefits &
Opportunities
Barriers & Limitations
Sources
Tax Credit
Advances
Various tax credits incent energy efficiency and renewable energy
technologies implemented during home energy improvements.
The Department of Housing and Urban Development (HUD)
facilitates Tax Credit Advances through State housing authorities
and non-profit organizations5.
Release loan underwriting standards. Contractually obliged to
purchase EE improvement loans from lending institution meeting
those standards. (Why not just make the loan oneself? Client
servicing?)
Advances reduces working
capital building owners
require to make retrofit.
Federal tax credits for most common home
energy retrofit measures expired at the end
of 20106.
Will not cover full (nor even majority)
financing.
(Cohen et
al 2009)
May align with time-of-sale
energy efficiency
Limited market penetration thus far.
Added time and complexity of EEM and
(Cohen et
al 2009)
Revolving
fund
Energy
Efficient
4
Example: NYSERDA Green Jobs Green New York program
Rolls financing for EE improvements into mortgage payments.
Jeff Schlegel and Nick Schlegel. August 2009. Financing and On‐Bill Repayment: Summary of Financing Issues & Mechanisms for Outside Capital. PowerPoint
Presentation to MA Energy Efficiency Advisory Council.
5
Rebecca Cohen, Megan Richardson & Jeffrey Lubell. 2009. Financing Residential Energy-Efficiency: Assessing Opportunities and Coverage Gaps in the American
Recovery and Reinvestment Act of 2009. Center for Housing Policy.
6
Energy Star. 2010. Federal Tax Credits for Consumer Energy Efficiency. Accessed January 12, 2011.
http://www.energystar.gov/index.cfm?c=tax_credits.tx_index
Mortgages
(EEMs)
FHA
PowerSavers
Fannie Mae
Energy Loan
Program
On-Bill
Financing
Various EEM packages already exist, notably FHA Energy Efficient
Mortgage Program, and the EnergyStar Mortgage. Fannie Mae
and Freddie Mac provide guidelines for independent loans.
HUD initiated Title I Property Improvement Loan Insurance
program. Insures private lenders for up to 90% of loan.
Unsecured if less than $7,500; secured with property lien for
above.8 Fixed interest, negotiated with lender.
High interest, non-securitized personal loan. Up to $20,000.
Utility collects surcharge on utility bill representing the monthly
financing payments for EE improvements.
Can be utility funded and solely adiminstered (eg. San Diego Gas
& Electric); or utility is the collection vehicle, and funds organized
through bank debt, municipal bond, Federal/State/Municipality
Grant, etc (e.g. Clean Energy Works Portland)9
Property
Assessed
Clean Energy
(PACE)
Financing
Treats EE as a tax-assessed property improvement. Payments
made through tax assessment. Funded through municipal bond,
or other sources. ~20 states passed enabling legislation prior to
summer 2010.
In summer 2010 Federal Housing Finance Administration, Fannie
Mae, and Freddie Mac expressed concern over the senior status
of PACE liens over mortgages. Fannie and Freddie have stated
they will not purchase mortgages with such senior liens in the
7
improvement policies
May provide opportunity for
EE programs with limited
capacity to market an
outside financing program;
does not need to be
developed in-house.
Rapid approval timeline
Consumer associates energy
savings and payments.
Charging the meter, not
consumer, avoids problems
if property is sold or rented.
Payments tied to the
property; avoids problems if
property is sold.
Accommodates
comprehensive energy
improvements.
associated home energy assessments at
time of purchase may limit homeowners
willingness to adopt EEMs7
FHA PowerSavers loans may be an
administrative burden for homeowners. FHA
does not allow ‘dealer loans’, so contractors
cannot assist building owner with
application. Additionally, loan lag time
between
High interest rates
Presuming high credit requirements
Utilities are hesitant to adopt traditional
banking functions for customers, and have
had difficulties aligning their billing systems
with the needs of home energy retrofits10.
Financing periods are typically short term
(about five years). Furthermore, utilities may
only have an interest in financing
improvements that impact the consumption
of their product (eg gas or electricity).
Therefore, financing comprehensive, whole
building EE retrofits is difficult.
May require enabling legislation at state
level.
Hinkle & Kenny (2010) suggest that a large
population of upper middle class
homeowners seems required to make
program effective. Requires many projects in
the pipeline to justify public bonds; interim
financing may be necessary to build market.
(LBNL
2010)
(Hinkle &
Kenny
2010)
Maine’s enabling legislation
establishes a “notice of PACE
Steve Cowell. October 2010. Personal communication.
Lawrence Berkeley National Laboratory. December 10, 2010. HUD PowerSaver Pilot Loan Program. LBNL Clean Energy Financing Policy Brief.
http://www2.eere.energy.gov/wip/solutioncenter/pdfs/LBNL_PolicyBrief_PowerSaver_121010_FINAL.pdf
9
Ibid.
10
Bob Hinkel and David Kenny. February 2010. Energy Efficiency Paying the Way: New Financing Strategies Remove First-Cost Hurdles. CalCEF Innovations
8
secondary mortgage market, effectively curtailing residential
PACE Programs in most juridictions11. Commercial PACE programs
continue in Sonoma County, LA, Washington DC and other
jurisdictions.12
agreement” in its registry of
deeds, establishing a second
mortgage and overcoming
the senior lien barrier.13
ESCO
Financing
On-Bill Financing/Repayments
Having customers make financing payments on their utility bill is an elegant collection mechanism for financing EE upgrades. Repayment on
utility bills avoids extra additional bills for customers, and encourages customers to associate home energy improvements with utility savings.
Perhaps because on-bill payments’ simplicity and intuitiveness, default rates for existing on-bill systems are typically low. What is more, if
payments are tied to the meter and not individuals, on-bill systems can help ameliorate split incentives between landlords and tenants.
However, on-bill systems can be time-consuming and difficult for EE program administrators to establish. Utilities often have reservations about
implementing these systems, and a variety of regulatory and legal issues may pertain depending on jurisdiction. Local governments seeking to
establish on-bill systems should prepare for extensive negotiations with utilities, utility regulators, and State government.
The table below lists various elements that comprise on-bill financing programs, and variables within these elements. It then provides strategic
direction to guide efforts to establish effective on-bill systems.
Program Elements
and Variables
Description
Strategic Considerations
Financing Mechanism
 Loans
 Tariff
Installation
On-bill payments can either be associated with
individual customers through loans, or the utility
meters through so-called “Tariffed Installation
Programs”. If tariffs are used, outstanding payments
are passed to the next occupant (in rented properties)
Tariff based programs have many advantages. They:
 Overcome split-incentive barriers between tenants/owners, as
tenants pay financing.
 Can accommodate longer lending terms, as repayments will
11
Bethany Speer. July 2010. Residential PACE Halted: Senior Lien a No-Go with Fannie Mae and Freddie Mac. National Renewable Energy Laboratory.
Renewable Energy Project Finance. http://financere.nrel.gov/finance/content/residential-pace-halted-senior-lien-no-go-fannie-mae-and-freddie-mac
12
John Farrell. January 2010. An Update on PACE Financing. Energy Self Reliant States. http://energyselfreliantstates.org/content/update-pace-financing
13
Efficiency Maine. 2010. PACE Program and Home Energy Savings Loans. http://www.efficiencymaine.com/pace
Programs
(associated
with meter)
or new owners (in the event of a sale). Conversely, the
balance of personal loans must be paid when occupants
leave. Typically, this results in shorter financing terms
for loans.
Tariff systems are an additional service charge, which
must be approved by the Public Utilities Commission.
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Cases
Two especially prominent residential EE upgrade
programs use loans:
 Pennsylvania Keystone HELP.
 Manitoba Hydro On-bill Loan.
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Midwest Energy uses on-bill tariff for residential
customers.
Program Administrator
 Utility
 3rd Party
Administration
14
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Some on-bill programs are administered solely by
utilities (example: San Diego Gas & Electric). In these
cases, utilities must assume the legal obligations of a
lender, as well as provide debt services and pursue
recourse in the event of default.
transfer to new occupants.
Better accommodate termination of utility services in the
event of a missed payment14 (see Security for more on this
security measure) CHECK – quoted correctly, but may
contradict other work]
Do not necessarily involve lendees assuming a debt obligation,
making them attractive to people and institutions (like some
municipalities) for whom assuming debt may be difficult15
Typically do not require program administrators to assume
duties of a lender under finance regulations, thereby avoiding
associated fees and administrative duties.
However Tariff based systems can be especially difficult to implement.
They:
 Require approval by the utility regulators, adding increased
complexity to their implementation. Program administrators
should promote benefits to regulators16.
 Could pass along payments for portable equipment
(refrigerators, etc) to new occupants that was removed by the
previous tenant17. Or equipment may not be useful to new
tenant (for example, if a restaurant was converted to dry
cleaners).
Having utilities serve simply as a repayment conduit for other
administrators has many advantages:
 Utilities have little experience in serving and creditors and
administering debt. They are often reluctant to assume these
Steve Moss and Jamie Fine. 2009. Left to Our Own Devices: Financing Efficiency for Small Businesses and Low-Income Families. Environmental Defense Fund
and San Francisco Community Power.
15
Matthew Brown. 2008. Paying for Energy Upgrades through Utility Bills. Alliance to Save Energy. Brown notes that many municipal customers require Board
or voter approval to assume debt.
16
Ibid.
17
EEAC. May 2010. On-bill Repayment Working Group Report to the Energy Efficiency Advisory Council. Accessed January 21st, 2010. http://www.maeeac.org/docs/5.11.10/OBR%20Working%20Group%20Report%20to%20EEAC%20-%20Final%20May%2010%202010.pdf
(Potentially:
Lending
institution,
State, Local
Government,
autonomous
agency, etc)
Administration
 Billing Systems
 Utility loan
servicing
 Managing
partial
payments
In the case of third party administrators, the utility
billing system serves merely as a conduit for payments
to these administrators. The administrator or lending
institution assumes responsibility for much of the
origination, debt servicing, and pursuit of defaulted
loans.
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Regardless of whether utilities assume administrative
duties, utilities face difficulties in adopting on-bill
systems:
 Different utilities use different billing
systems/software. Incorporating on-bill
payment into existing systems can be onerous
for utilities, requiring substantial changes to
systems.
 Utility customer service personnel require
training and systems to handle inquiries
regarding on-bill systems.
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roles.
May avoid regulation under Truth in Lending Act18 – [CHECK].
Changing billing systems and staff training can make utilities
wary of engaging in on-bill systems. Engage utilities early
regarding the prospect of addressing these hurdles.
Negotiating more senior status for financing repayments may
allow for better terms from lenders; this will likely be opposed
by utilities [MAY BE TOO FAR OUT OF LEFT FIELD - KEEP?]
Customers may make only a partial payment. Typically,
electricity generation and distribution charges will be
paid first. [CHECK] The Massachusetts Energy Efficiency
Advisory Council On-bill Financing working group
suggests placing loan repayments in a junior position.
Sources of Capital
 Utility
 Other
In utility administered programs, capital may be
sourced by utilities, or stem from a regulator approved
public benefit charge.
Programs administered by other parties can access
many other funding sources.
18
Using capital from outside of utilities has the following advantages:
 It may be more flexible, allowing for financing programs to
serve riskier customers.
 It accommodate comprehensive retrofits more easily - Utilities
frequently only serve one commodity market (electricity, gas,
etc). In these cases, they have little incentive to use their own
funds to impact consumption of energy commodities they
don’t sell; electrical utilities have no incentive to reduce gas
Matthew Brown. 2009. Models for Financing Clean Energy. Powerpoint presentation. Accessed January 14th 2010, http://www.maeeac.org/docs/BrownPresentation_Financing_SWEEP110909.pdf
Underwriting Criteria
 Utility bill
payment
history
 FICO score,
debt-toincome, etc
Utility bill payment history (for example, over last 12
months) can be used to qualify participants in program.
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Pennsylvania’s Keystone HELP loan program for
residential sector uses FICO score and debt-to-income
ratio as well.
consumption. Outside sources of capital can leverage savings
from all utilities, allowing for comprehensive energy retrofits
and deeper savings.
Work to make financing accessible to lower-income and credit
customers.
Use credit enhancements to broaden underwriting criteria
limits.
Regardless of underwriting criteria, default rates have
been low in on-bill systems.
Security
 Utility service
termination
 Other
securities
 Unsecured
Stipulations that customers be disconnected from
utility services if they do not make financing
repayments is sometimes used as a security provision in
on-bill financing. Other securities, such as a property
lien, could be applied as well.
Even those programs without a disconnection clause as
security have experienced low default rates - around 13% or less. It may be that having the loan repayment on
the utility bill is a sufficiently manageable repayment
mechanism for most customers that disconnection
security provides minimal additional value.
Reasons to implement service termination security
 Lending institutions may be wary of making unsecure loans.
This may increase the cost of capital (EEAC 2010).
Reasons against termination security
 Utilities may be concerned with customer backlash
 Program optics, administration & legal costs associated with
customers who contest termination
 May violate consumer protection regulations
Use documented low default rates in unsecured programs to test
lender receptivity to unsecured loans.
Recommendations and Guidance when Pursuing On-Bill Financing
Assess the need – work to quantify or qualify the extent to which on-bill financing programs will encourage greater rates of energy upgrades.
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Research and articulate exactly how on-bill financing will better serve customers who currently are under engaged in EE upgrade
programs.
Engage stakeholders and make the case for on-bill collection mechanisms
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Develop a strong case for how an on-bill financing will improve financing offerings. Implementation of on-bill financing programs has
required extensive negotiations.
Engage utilities. Scope what potential barriers may be:
o How difficult will it be to make utilities billing systems compatible with on-bill financing?
o Staff training requirements?
o Capacity to engage in debt servicing.
Focus on building utility regulators and utilities excitement in an on-bill financing program. Regulator buy-in can be a strategic lever to
push utilities into developing on-bill systems expediently.
Be prepared for protracted negotiations. Providing on-bill financing may require changing state legislation. Agencies in New York have
been negotiating for two years; NYSERDA is attempting to statewide legislation to allow for19:
o On meter tariffs, associated with the bill
o Termination provisions for failure to pay
Multiple utilities may make establishing programs more difficult
19
Jeff Pitkin. January 11th 2011. Innovations in Financing Efficiency: New Programs and Partnerships at NYSERDA. Power Point Presentation.
http://cbey.research.yale.edu/calendar/57/1667-NYSERDA-Innovations-in-Financing-Energy-Efficiency
Useful Graphics/Data
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Source: Brown 2010.
Funding Source:
-
Energy or utility fuel taxes – local government jurisdictions have the authority to implement energy or fuel taxes. Can provide steady
source of funding for EE and energy planning programs. Possibility of diversion when budget shortfalls occur in the jurisdiction.20 May be
politically unpopular, despite small added costs. Likely insufficient base to
o Montgomery County, Maryland implemented a 0.5 cent tax on electricity for residential customers, $0.014 for non-residential
customers.
o Boulder, Co
Financing Mechanisms:
20
Moria Morrissey, John H. Reed, Charles Bailey, & Jeff Riggert. 2010. Opportunities for Increasing the Penetration of Energy Efficiency by Leveraging the
Resources of Local Governments. ACEEE Summer Study on Energy Efficiency in Buildings.
Credit Enhancements
This whole section derived from (Brown 2010) and (MacLean 2010)
Credit enhancements are essentially funds set aside to cover potential losses to lenders from defaulting customers (Brown 2010). These funds
are typically 5-10% (Brown 2010), 2-10% (MacClean 2010). A source of flexible capital, money that can be lost but the aim is not to, should be
used to establish credit enhancements. Establishing credit enhancements can realize the following benefits for EE programs and their customers:
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Substantially leverage the amount of private financing available through concessional funds; typical leverage ratios (private financing/
are on the order of 20 times the concessional funds [check].
Encourage lenders to make loans that are perceived as riskier – thereby serving the customers most in need of EE financing, and
providing terms that can finance more comprehensive EE retrofits.
o Reduce customer minimal credit requirements
 FICO scores
 Debt to income ratio
 Increase loan to value ratios
 Lowers customer capital contribution requirements
o Lengthen loan tenure
o Larger unsecured loans
Lower interest rates21
Spur interest in a new market
Credit enhancements take the form of:
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21
Loan loss reserves (contingent on availability of funds)/guarantees (guaranteed available)
Subordinated debt structures – check out Washington State Housing Authority – noted in Brown 2010b.
Loan insurance
o “Very limited availability of any loan loss insurance now –used to be available in the past.
List derived from: John MacLean. January 15 2010. Structuring Loan Loss Reserve Funds for Clean Energy Finance Programs. Powerpoint Presentation. Energy
Efficiency Finance Corp.
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o Insurance that is available is quite expensive.
o Not a recommended option at this point.” (Brown 2010b)
Could classify interest rate buy-downs – really more of a subsidy
o Achieved by using NPV of difference between market & desired interest rate
When negotiating with lenders and drafting credit enhancement agreements, EE program managers should bargain to maximize these benefits.
They should also seek to establish loan application protocols, documentation requirements, and underwriting guidelines, that fit seamlessly into
the energy improvement sales and workflow (MacLean 2010).
MacLean (2010) notes that two legally binding documents will be established for EE improvement programs:
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“Loan Loss Reserve Agreement - between the financial institution and donor
EE Loan Program Agreement - between the FI & Program Administrator or Energy Services Providers”
Guidance:
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Negotiate underwriting standards
Negotiate loan loss reserve. Brown (2010b) notes 5% loss reserve might achieve leverage ratio of 20X.
Structure based on portfolio of outstanding loans, not individual loans. Brown (2010b)
o “Eg. A loss reserve set at 5% of total outstanding loan balance, with lenders able to recover up to 80% of the balance of any
individual loan in default.”
“Default definitions critical –90 days/120 days is typical.
Assignability –credit enhancement should travel with the loan upon sale of the loan.”
Loan Loss Reserve
MacLean (2010):
Main considerations when developing loan loss reserve fund:
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

“Ratio of (A) total original principal amount of Loans in portfolio, to (B) LRF funds. A/B = leverage ratio
First loss percentage = portion of the total Loan portfolio original principal the LRF will cover, e.g., 2-10%
Share of first losses that LRF will pay, e.g., 80-90%+; balance to the account of the FI. May have multiple LRF contributors.”
Financing Program Administration
Can get established lenders (banks, CDFIs, those with the infrastructure to manage loans) to perform loan origination and loan servicing.



Servicing: $7-$15/month.
Origination: $300-$600/loan is typical22
Therefore, have to minimize these costs
The lender may be paid a loan origination fee – NYSERDA pays $175 per residential loan provided by their program lenders (Pitkin 2010).
Loan servicing includes collection, processing delinquencies, etc. Programs may contract out loan servicing duties.
“Lending partners:
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


Credit unions: Understand small loans, community-minded.
Specialty Lenders: Know energy finance very well
Community Development Financial Institutions (CDFI) lenders: low cost, but limited amounts of capital
Public lenders (state or municipal bonding authorities such as housing finance agencies): low cost capital availability”
“What will bring these lenders to the table?
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
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
22
A market for loans –deal flow. (Many lenders hungry for good quality loans).
Good quality borrowers with good credit.
A secondary market for loans (a place to sell the loans).
Credit enhancements.”
o All quotes from (Brown 2010b)
Matthew Brown. 2010. Financing Energy Efficiency: Credit Enhancements and Leveraging Strategies. ConnoverBrown LLC. PowerPoint presentation.
Strategic Considerations & Further Hypotheses
Based on this preliminary assessment of the financing landscape, I intend to interview industry experts and EE program managers to explore the
following hypotheses and questions:
23

Programs with limited capacity can begin by advertising and facilitating existing financing tools (such as FHA PowerSaver, Fannie Mae
Energy Loan, Energy Efficient Mortgages, etc), then expand into more high quality, locally tailored financing tools. Establishing rigorous
financing programs is complex, requiring substantial capacity. Moreover, lenders must see a solid market for energy efficiency
improvements before they invest. Therefore, new programs may benefit by initially only focusing using an established financing tool. In
time, market and capacity will grow, and more enabling financing tools can be developed.
o Is this the pattern that previous programs followed?
o Will insufficient financing incapacitate new programs?

Funding – Aggregation between programs across local governments and/or States can create economies of scale for financing and
reduce the administrative burden of developing programs. Aggregators can be program administrators from existing/developing
programs, absorbing new territory as scope increases23. To what extent do economies of scale impact the attractiveness of terms that
can be cost-effectively offered in home energy improvement financing programs?

How should organizations balance the opportunities to provide credit enhancements and more attractive rates? Does providing credit
enhancements effectively eliminate the renewability of funds, more quickly than would occur in a revolving loan situation? What are
arguments against credit enhancement in the EE market?

Is a junior lien acceptable to lenders in the PACE market?

Trade off between providing financing packages for low-income, and exposing them to increased debt? Comment on that? E.G. EEAC
does not want to provide any on-bill financing tool to low-income folks – but they are paying for utilities still. Relies largely on incentives.
Clair Broido Johnson. 2009. Municipal Energy Financing. Power Point presentation, delivered June 1 2009.
Notes
Energy Efficiency Mortgages (Cohen et al 2009)
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Limited uptake amongst private sector. Fannie Mae offers some packages.
Policy improvements:
o “Disregard cost of improvements for loan qualification purposes
o “Adjust effective income by projected energy cost savings”
o Adjust home value to reflect expected efficiency improvements” (Cohen et al 2009)
Energy Star mortgages: EPC, EPA, DOE, State energy agencies
o See. Energy Star. 2010. Mortgage Lending Programs. Accessed January 12, 2011
http://www.energystar.gov/index.cfm?c=mortgages.mortgage_lending_programs
Interest Rate buy-downs
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Subsidy; reducing interest rates. NY, Alaska, Louisiana
Subsidies especially appropriate to low-income, rental housing. Example Seattle’s HomeWise program. (Cohen et al 2009)
Split incentives – 4 out of 5 renters pay own electric bills. 2 out of 3 pay gas. (Cohen et al 2009).
In analysis of Pennsylvania single family home market: 80% homeowners >200% AMI; 70% home improvements financed in some way; 90% of
home improvements over $20k are financed24
24
Peter Krasja. 2010. State Incentived Consumer Financing Programs. Accessed January 16, 2010 http://www.cleanenergystates.org/Presentations/CESA_EPCAFC_1.22.10.pdf
Source: Matthew Brown. 2010. Financing Programs for Energy Efficiency. Power Point Presentation.
Source: Fuller, Kunkel & Kammen 2009.
This is so valuable. Could potentially have some sort of online system – popping out context for each piece.
Sources of Capital
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Pitkin (2011) has nice summary of NYSERDA navigating the QECB process.
Questions
Any special regulatory difficulty using a tariffed installation program with financing and repayment flowing to a third party financial institution?
What analysis can best determine the need for on-bill financing? How to determine the extent of split-incentive, etc.? Good examples?
Billing systems – is there a move to developing billing systems compatible with on-bill financing? Any indication how fast that is changing?
What are the specific Truth in Lending Act, typical Utility Regs, consumer lending law concerns?
Easier for unregulated utilities?
How vital a security do lending institutions feel that shutoff provisions are?
What is the magic interest rate?
Assuming LG with lesser capacity? Good opportunity to just use Fannie Mae Energy Loan, FHA PowerSavers, focus on getting local financial
institutions to develop financing packages using these tools? As opposed to immediately seeking to develop own financing tools? States will be
acting on providing financing opportunities as well.