Financing Policy Webinar with Congressman Israel and Matthew Brown - Matthew Brown
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Financing Policy Webinar with Congressman Israel and Matthew Brown - Matthew Brown

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November 19, 2009 - The Alliance hosted a webinar that addressed a range of current financing proposals, including a discussion by Congressman Israel on Property Assessed Clean Energy (PACE) bonds and ...

November 19, 2009 - The Alliance hosted a webinar that addressed a range of current financing proposals, including a discussion by Congressman Israel on Property Assessed Clean Energy (PACE) bonds and an overview by Matthew Brown on models of clean energy financing.

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Financing Policy Webinar with Congressman Israel and Matthew Brown - Matthew Brown Financing Policy Webinar with Congressman Israel and Matthew Brown - Matthew Brown Presentation Transcript

  • Models for Financing Clean Energy Matthew H. Brown ConoverBrown LLC [email_address] 720 246 8847
  • ConoverBrown LLC
    • Consulting firm with a specialty in financing for clean energy & environmental strategy.
    • Domestic and International government, non-profit and private clients.
    • Published numerous papers on clean energy finance – including most recent one for SWEEP.
    • Clean energy finance clients include states, lenders, national and regional associations and advocacy organizations. Working with these clients to set up new financing programs.
  • The Goal of Many New Financing Programs is to:
    • Move beyond the small scale pilot to large scale implementation of efficiency.
    • Make the programs simple to use, with a low hassle factor.
    • Remove the first-cost barrier to energy efficiency.
    • Balance credit management with amortization period: longer loan terms = smaller monthly payments.
    • Attract low cost capital to finance the program.
  • How much do most people really care their energy bill?
      • (Unless you’re a big industrial company, not that much, really)
  • Considerations for Successful Financing
    • Simplicity Appropriate to the Need
      • Different market and submarkets need different levels of complexity. For example:
        • Mortgage loans require much greater due diligence than a small $5,000 loan or credit card.
        • Small business needs for energy retrofits differ greatly from residential energy retrofits or emergency appliance replacements.
  • Considerations for Successful Financing
    • Remember the financing alternatives
      • Home equity line of credit
        • Typically variable rate product.
        • Assumes that one has equity in the home.
        • More difficult to access now than 2+ years ago.
      • Consumer credit
        • Typical of a Home Depot/Loews credit card.
        • Often with a discounted teaser rate that increases dramatically.
      • SBA 7(a) loans:
        • May often be for larger amounts than typical business retrofits.
        • Personal guarantee required of the business owner.
  • Outline
    • What we’re financing
    • How we’re financing it
  • The What:
    • What will we finance?
  • Typical Projects
      • Homes
        • Home energy renovation based on an audit, insulation/duct sealing, HVAC. Larger project might incorporate solar.
      • Small Business
        • Lighting retrofit, HVAC. In some custom cases, could include small manufacturing with motor or process improvement with new equipment.
  • How are programs marketed?
    • Most programs are marketed through networks of contractors.
      • HVAC
      • Electrical
      • “ Home Performance” and energy auditors
    • As a rule (with exceptions) programs marketed by lenders, through government agencies or by utilities have not reached big market share.
  • Role of Contractors in Financing
    • For unsecured loans
      • Contractors receive education on the financing program that they can offer.
        • Typically give customer a loan application, may do loan application over the web or through a 1-800 number.
        • Customer and contractor know very quickly whether loan is pre-approved.
    • Secured loans require a longer underwriting analysis and are tied to larger projects.
  • Typical Value of Retrofits
    • Homes
      • On very low end, from $2,000-$5,000
      • On high end, $30,000 if combined with solar or other major retrofit
      • Average project is around $5,000
        • Too large for the average cash purchase or a credit card. Too small for a 2 nd Mortgage.
  • Typical Value of Retrofits
    • Small Business
      • Variable, with most projects in the range of $8,000-$12,000. Lighting and some HVAC is typical.
      • Small manufacturing improvements are custom projects and can run substantially more, or up to $100,000 or more.
  • The How
    • What are some potential financing structures?
  • Customer Contacts Contractor and Arranges for Work Performance Customer Fills Out Loan Application Provided by Contractor Lender Processes Loan App Lender Rejects App Loan Approved Contractor Completes Work and Subject to Approval by Customer/Utility, Is Approved for Payment Lender Pays Contractor Utility Places Principal & Interest Charge on Utility Bill Utility Pays Lender Upon Receipt 3 rd Party Escrows Loss Reserve In Case of Default, 3 rd Party Pays Lender According to Loss Reserve Terms A Conceptual Model Under Discussion Lender Bills Borrower for Principal & Interest Customer Pays Lender
  • Customer Contacts Contractor and Arranges for Work Performance Customer Fills Out Loan Application Provided by Contractor Lender Processes Loan App Lender Rejects App Loan Approved Contractor Completes Work and Subject to Approval by Customer/Utility, Is Approved for Payment Lender Pays Contractor Utility Places Principal & Interest Charge on Utility Bill Utility Pays Lender Upon Receipt 3 rd Party Escrows Loss Reserve In Case of Default, 3 rd Party Pays Lender According to Loss Reserve Terms A Conceptual Model Under Discussion: 2ndary Market Lender Bills Borrower for Principal & Interest Customer Pays Lender Lender sells loan to secondary market investor Loan Servicer Bills Customer Customer Pays Servicer In Case of Default, 3 rd Party Pays Investor According to Loss Reserve Terms
  • Typical Loan Terms
    • Terms run from 2-10 years for most programs and up to 20 for some, depending on:
      • Small business loans may be shorter than consumer loans. 24-48 months.
      • Residential may be 48-60 months.
      • Smaller value loans tend to be shorter term.
      • Loans that incorporate solar or more expensive equipment tend to be longer term.
  • Influence of Loan Term on Payments
  • Examples of Loan Term
    • PA program: up to 10 years. Typical loan is 48 months.
    • Boulder, CO program is up to 20 years, but is built on a first mortgage lien.
    • United Illuminating (CT) (Small business program) typical loans are two years but can extend to longer period.
  • Security and Collateral
    • Program structures vary.
      • Unsecured loans common in residential sector for for loans up to $12,500.
        • Pennsylvania and Colorado use this approach.
      • Secured loans are more common above this level.
        • Most common security is a lien on the house.
          • Property Assessed Clean Energy Model
  • Security and Collateral
    • In many cases, secured loans are not compatible with the market.
      • The market for most loans is a quick-decision type of market, requiring fast credit analysis or the sale is lost to a less efficient product.
  • Interest Rates
    • Interest rate
      • Ranges from 0% to 8.99% for unsecured loans. (CT to PA)
      • Extremely low interest rates (0-4%) are not necessary in most cases:
        • Some of the highest participation programs (Manitoba Hydro, Keystone HELP) are not the lowest rate programs.
        • Interest rates and low-as-possible monthly payments are likely most important for residential or small business audit-based energy retrofits.
  • Loan Servicing
    • Lender-serviced loans
      • Pennsylvania -- AFC First services loans.
    • Fannie-Mae serviced loans
      • Fannie-certified loan servicer services loans under lender-branded name. (WECC/EFS model)
    • Utility-serviced loans
      • In on-bill financing programs (CT, KS).
      • Most common where utility provides capital.
  • Origination and Underwriting
    • Those with capital at risk perform underwriting.
    • Utility models and Lenders models
      • Utility model – may not look at FICO score, but looks at internal review. Bill payment, years in business/at same location.
      • Lender model – relies on FICO score more heavily. 640 and above is typical. Sometimes 700 and up.
  • Credit and default rates
  • Credit Enhancements
    • Loss Reserves are among the most common types of credit enhancements
      • Pennsylvania Keystone HELP program has a 5% loss reserve ($1,000,000 on $20,000,000)
      • Colorado program, now under bid, has similar loss reserve set up.
    • Illinois offers a 100% loss provisions.
    • DOE is examining potential for loan guarantees.
  • Companion Bill Example
    • Pennsylvania Keystone HELP
  • Pennsylvania: 3rd Party Lender
    • Among most successful ee financing: simple and effective with an innovative capital source.
    • Keystone HELP offers unsecured personal loans at rates ranging from 4.99%-6.99%.
      • 4.99% for whole-house, audited measures.
      • 5.99% for advanced measures.
      • 6.99% for straight-up ENERGY STAR® measures
    • Administered by a 3rd party lender that specializes in energy lending.
    • Delivered through a certified contractor network& 1-800 number.
  • Pennsylvania: 3rd Party Lender
    • Typical loans are from $5,000-$7,000 over a 4-5 year term.
    • Capitalized with $20 million + from State Treasurer.
    • Distribution of ~3,500 installations:
    Whole-House 10% Windows/Insulation 30% HVAC 60%
  • Manitoba Hydro: On-Bill Loan
    • Most successful loan program in the country with $200 million through 50,000 loans. Residential sector only.
    • 4.9% rate for all loans is subsidized by utility (non-subsidized rate would be 5.9%). Maximum loan size is $7,500.
    • Covers insulation, lighting HVAC, windows, doors + others.
    • Program administered by uitility.
    • But delivered through a strong network of contractors.
  • Manitoba Hydro: On-Bill Loan
    • Most successful loan program in the country with $200 million through 50,000 loans. Residential sector only.
    • 4.9% rate for all loans is subsidized by utility (non-subsidized rate would be 5.9%). Maximum loan size is $7,500.
    • Covers insulation, lighting HVAC, windows, doors + others.
    • Program administered by uitility.
    • But delivered through a strong network of contractors.
    • The program uses a streamlined application process.
      • Borrowers know within minutes if they are approved.
  • Connecticut: On-bill loan
    • United Illuminating (UI) program is one of the most successful on bill loan programs in the small commercial sector. Has reached nearly 1/3 of eligible customer base.
    • UI offers a 0% loan that is paired with rebates.
    • UI-certified contractors conduct an audit and provide results to the utility. Customer/borrowers apply for loans and are screened for credit worthiness.
    • Default rates on loans have been less than 1%.
  • Connecticut: On-bill loan
    • UI is now bumping up against its $4.5 million program maximum and has asked the utility commission to increase loan maximum to $7 million.
    • Lighting upgrades and refrigeration make up the majority of the installations. Typical loans are $8-12,000.
    • The combination of rebates and on bill loan always give the customer a net positive cash flow from day one.
    • Relationship with contractors has been absolutely critical to program success.