Financing Programs for Energy Efficiency
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Financing Programs for Energy Efficiency



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 ...

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 Financing Programs for Energy Efficiency Presentation Transcript

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