Financing Programs for Energy Efficiency

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This PowerPoint is a discussion of options for financing clean energy. It describes financing processes, and outlines specific options related to on-bill financing structures, 3rd party structures and commercial lending structures. It was originally presented to RE-AMP, an organization of environmental advocates operating primarily in the Midwest.

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  • Typical deal size of $5 million. Gets the payment off the balance sheet.
  • Financing Programs for Energy Efficiency

    1. 1. Matthew H. Brown Harcourt Brown Energy & Finance Matthew.Brown@HarcourtBrown.com 720 246 8847
    2. 2. <ul><li>Consulting firm with a specialty in clean energy financing & related energy policy. </li></ul><ul><li>Published numerous papers on clean energy finance. </li></ul><ul><li>Clean energy finance clients include states, utilities, lenders, federal agencies, national and regional associations and advocacy organizations. </li></ul><ul><li>Working with these clients to set up new financing programs. </li></ul>
    3. 3. <ul><li>Cost effectiveness tests for utilities are getting more challenging. </li></ul><ul><li>Ratepayers are getting more sensitive to higher rates. </li></ul><ul><li>EE goals are getting more aggressive in some places. </li></ul><ul><li>The trend away from CFLs may require more focus on attached fixtures w/larger investment upfront. </li></ul><ul><li>Rebates and tax incentives may not be the most cost effective way to do the job. </li></ul><ul><ul><li>Leveraged, private capital may be much more effective. IF it is designed effectively. </li></ul></ul>
    4. 4. <ul><li>Energy efficiency investments consist of: </li></ul>Market Measures Typical Per-Installation Cost Residential HVAC systems, insulation, duct sealing, appliances, water heaters, windows, doors $7,500 Commercial Lighting, HVAC, Motors $10,000 and up Industrial Motors, Customized Improvements $100,000 and up
    5. 5. <ul><li>Almost no one wants financing. </li></ul><ul><li>But people want the stuff that financing lets them buy (granite countertops, furnaces, cars, homes…) </li></ul><ul><li>So: sell energy efficiency. Make financing seamlessly easy to access. </li></ul><ul><li>Financing programs need to be tightly integrated into every other element of marketing, rebates, etc. </li></ul>
    6. 6. <ul><li>Who Lends? </li></ul><ul><ul><li>State - energy office </li></ul></ul><ul><ul><li> - HFA </li></ul></ul><ul><ul><li>Utility </li></ul></ul><ul><ul><li>Finance company </li></ul></ul><ul><ul><li>Bank </li></ul></ul><ul><ul><li>Credit Union </li></ul></ul><ul><ul><li>CDFI </li></ul></ul><ul><li>Capital Sources </li></ul><ul><li>Banks </li></ul><ul><li>Credit Unions </li></ul><ul><li>CDFIs </li></ul><ul><li>Bonding </li></ul><ul><li>Federal </li></ul><ul><li>Other (Treasury) </li></ul><ul><li>Utilities </li></ul>Lend <ul><li>Repay </li></ul><ul><li>On Bill </li></ul><ul><li>Property Tax </li></ul><ul><li>Other Fee </li></ul><ul><li>3 rd Party </li></ul><ul><li>Enhance </li></ul><ul><li>Loss Reserve </li></ul><ul><li>Debt Service Reserve </li></ul><ul><li>Loan Insurance </li></ul><ul><li>Sub Loans </li></ul><ul><li>Security </li></ul><ul><li>Tax lien </li></ul><ul><li>Fixture lien </li></ul><ul><li>At the meter </li></ul><ul><li>Unsecured </li></ul><ul><li>Sources: </li></ul><ul><li>Federal </li></ul><ul><li>Foundations </li></ul><ul><li>Utilities </li></ul>
    7. 7. <ul><li>Everything starts with the source of capital. </li></ul><ul><ul><li>Flexible capital that can be put at risk can be used to: </li></ul></ul><ul><ul><ul><li>1. make loans to below-typical credit quality borrowers. </li></ul></ul></ul><ul><ul><ul><li>2. make loans for extended periods (eg. 15+ years in residential programs) </li></ul></ul></ul><ul><ul><ul><li>3. provide financing where the obligation to pay stays with the meter </li></ul></ul></ul><ul><ul><li>Traditional capital sources will take on less risk than flexible capital sources. </li></ul></ul>
    8. 8. <ul><li>Credit enhancements </li></ul><ul><ul><ul><li>Money that a utility sets aside to cover potential losses that a lender might incur, up to some maximum amount. </li></ul></ul></ul><ul><ul><ul><li>If losses are less than the amount of the credit enhancement then the utility gets its funds back or the funds can be used to support additional lending. </li></ul></ul></ul><ul><ul><ul><li>If losses are greater than the size of the credit enhancement, the lender bears the loss. </li></ul></ul></ul><ul><ul><li>Ratepayers/shareholders funds are leveraged by a multiplier (5% reserve = 20x leverage) while capping the amount of ratepayer/shareholder exposure. </li></ul></ul>
    9. 9. Assemble multiple sources of capital, each with different risk tolerances Then give a role to each of those capital sources appropriate to its risk tolerance and other characteristics – eg. time horizon
    10. 10. <ul><li>Utility-based structures </li></ul><ul><ul><li>Tariff Based </li></ul></ul><ul><ul><li>Loan-Based </li></ul></ul><ul><li>3 rd Party, Loan Loss Reserve-based structures </li></ul><ul><li>Commercial Programs </li></ul>
    11. 11. Move to the right and the utility role diminishes while non-utility role increases. “ Utility” could be shareholder or ratepayer funds.
    12. 12. <ul><li>Tariff-based; obligation passes with meter. </li></ul><ul><ul><li>3% for most loans. </li></ul></ul><ul><ul><li>15 years for residential. </li></ul></ul><ul><ul><li>10 years for commercial. </li></ul></ul><ul><ul><li>Capital source: utility, ARRA. </li></ul></ul><ul><ul><li>Disconnection for failure to pay. </li></ul></ul><ul><ul><li>Financing charges cannot exceed 90% of average annual energy savings. </li></ul></ul><ul><ul><li>About 500 projects completed worth $2.5 million. </li></ul></ul><ul><ul><li>0 defaults as far as known. </li></ul></ul>
    13. 13. <ul><li>Utility Invoicing </li></ul><ul><ul><li>Set up so that utility does not provide capital, but only bills on behalf of a 3rd party lender. </li></ul></ul><ul><ul><li>Since the utility is not the creditor, it should avoid regulation under TILA. </li></ul></ul><ul><ul><li>One variant is to have two EFT payments (one for lender and one for utility bill). </li></ul></ul><ul><ul><li>Under consideration in Indianapolis (IPL). </li></ul></ul><ul><li>3 rd Party Billing w/Utility Capital </li></ul><ul><ul><li>Not aware of any such programs in operation. </li></ul></ul>
    14. 14. <ul><li>Utility provides funds to cover loan defaults up to a certain level. </li></ul><ul><ul><li>Typical levels for residential lending are 5%-10%, depending on credit quality. </li></ul></ul><ul><ul><li>In exchange, lender offers a reduced interest rate, longer loan term or broader access to capital (relaxed underwriting standards). </li></ul></ul>
    15. 15. <ul><li>Recruit lenders to do loan origination and loan servicing. </li></ul><ul><li>Use flexible capital to credit-enhance: </li></ul><ul><ul><li>Attract private lender capital by covering a portion of losses (risk). </li></ul></ul><ul><ul><li>Convince lenders to reduce their interest rate </li></ul></ul><ul><ul><li>Convince lenders to extend loan terms </li></ul></ul><ul><ul><li>Convince lenders to loan to a broader spectrum of the population (riskier loans). </li></ul></ul>
    16. 16. <ul><li>$60 million loan facility based on $3 million loan loss reserve . </li></ul><ul><li>7% rate to borrower. </li></ul><ul><li>10 year max loan term. </li></ul><ul><li>640 and a higher FICO score required (about 50% of MI population qualifies). </li></ul><ul><li>Marketed through a contractor network. </li></ul><ul><li>Launched a couple of weeks ago. </li></ul><ul><ul><li>50% approval rate. About 25 loans made. </li></ul></ul>
    17. 17. <ul><li>Legislation required utilities to develop efficiency financing programs -- $2.5 million each utility for a statewide total of $12.5 million. </li></ul><ul><li>Utility ratepayers would cover 100% of defaults. </li></ul><ul><li>A 3 rd party entity conducts all loan origination and servicing. Capital source is still uncertain. Loan terms TBD. Contract awarded but not public. </li></ul><ul><li>Program size is limited to $12.5 million statewide. </li></ul>
    18. 18. <ul><li>Utilities cover defaults on loans (but do not originate or service loans). </li></ul><ul><li>Participating banks offer a 5% loan with a minimum FICO score of 650. </li></ul><ul><li>Loan terms up to 24 months for small loans (up to $2,000). </li></ul><ul><li>Terms go to 7 years for loans up to $15,000. </li></ul><ul><li>Loan products for large residential and large C&I under development. </li></ul><ul><li>Negotiations conducted directly with the Mass Bankers Association. </li></ul>
    19. 19. <ul><li>Attractive because of larger project sizes and much better paybacks on energy efficiency investments. </li></ul><ul><li>Federal capital more restricted than in residential. </li></ul><ul><li>Credit is more difficult to evaluate than residential. </li></ul><ul><li>Ownership structures are often complex. </li></ul><ul><li>Loan sizes are often odd (too small for most lending). </li></ul>
    20. 20. Metrus Engineering Firm Bank Special Purpose Entity (Established by Metrus for customer) Customer/Host (Seeking Energy Efficient Solutions and Equipment) $ (Debt) $ (Equity) $ (Service Charge) $ (Fee for Service) Provides Initial System Audit and Performance Guarantee on system upgrades <ul><li>Customer takes on no additional debt and instead pays a monthly service charge. </li></ul>
    21. 21. <ul><li>Many sources of funds can be used to provide leverage to attract private capital. </li></ul><ul><li>Capital sources and combinations of capital sources are the key to successful lending. </li></ul><ul><li>Finance programs need to be designed to put different parties and different kinds of capital in their proper roles. </li></ul>
    22. 22. <ul><li>Loan programs can work, if they are streamlined and marketed not just as financing but as a means to better equipment, more energy savings. </li></ul><ul><li>Financing is necessary but not sufficient to making an energy efficiency program successful. </li></ul>

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