Financing Energy Efficiency: Credit Enhancements and Leveraging Strategies
Financing Energy Efficiency:
Credit Enhancements and
Matthew H. Brown
720 246 8847
Consulting firm with a specialty in financing for
clean energy & environmental strategy.
Domestic and International government, non-
profit and private clients.
Clean energy finance clients include U.S. Dept
of Energy, Iowa, Colorado, Michigan, utility,
lender, national and regional associations and
Working with these clients to set up or assist in
establishing new financing programs.
It’s all about going to scale:
100 million households in the United States.
Typical basic-only efficiency installation investment is
$7,500, including HVAC, duct sealing, insulation --
but can range higher, up to $10,000.
Total market, on this basis is $750,000,000,000-
Utility, government capital will not be sufficient to
meet this goal. Private investor capital is
critical. (And this is only the residential side)
More on Market Size and Need
3 million furnace, a/c and water heater
replacements each year. (Residential focus)
Likely market for HVAC retrofits (replacements)
alone is approximately $7 billion per year.
Additional products and sub-markets in the
residential sector include insulation, windows,
A Definition: What are we
Energy efficiency investments consist of:
Market Measures Typical Per-
Residential HVAC systems,
Commercial Lighting, HVAC,
$10,000 and up
Industrial Motors, Customized
$100,000 and up
2 Typical Kinds of Residential
Unsecured High volume, low value loans. Uniform set of measures.
Consumer credit model. Underwriting typically based on
credit score, debt-income ratios. Fast-response loan
evaluation. Conforming product draft in development.
Limited 2ndary market.
Secured Higher value (>$12,500-$30,000) loans in residential
sector. Tax or other lien typical. Often for “whole house”
renovations or solar. Tax-lien financing model is getting
attention. Limited 2ndary market.
Lender Context: A quick
breakdown of costs
Origination: $300-$600/loan is typical
On a $5,000 loan, it’s really important to
keep those costs as low as possible.
And…typical mortgage lenders will not be
interested in these loans. They aren’t set
up to do a lot of small unsecured loans.
Who are the lender partners?
Credit unions: Understand small loans,
Specialty Lenders: Know energy finance very
Community Development Financial Institutions
(CDFI) lenders: low cost, but limited amounts of
Public lenders (state or municipal bonding
authorities such as housing finance agencies):
low cost capital availability
What will bring these lenders to
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 Come in
Loss Reserves or Guarantees
Interest rate buydowns sometimes fall
into this category
Not addressed in detail here.
Typically structured as a payment to the
lender based on NPV of difference between
market and target interest rate.
Why Are Credit Enhancements
Help to make lenders comfortable with a
new and unfamiliar product.
Help to extend the range of potential
borrowers to those who might not
otherwise be able to borrow.
Increases amount of capital available to
lend by attracting investor and lender
interest in a product.
Issues to Consider with Credit
Make sure that there’s a real benefit to the
enhancement -- eg. a lower interest rate, more
Consider ways to customize the enhancement (eg.
Reduce reserve size based on improving default
Find maximum leverage – 20x leverage based on
5% loss reserve isn’t unreasonable.
Pre-agreed underwriting standards are critical.
Eg. 680 credit score, 50% debt/income ratio.
Issues to Consider with Credit
Don’t give away the farm: a full guarantee may not
leave enough “skin in the game” to encourage
appropriate underwriting and collections.
Recommend structuring the enhancement on the basis
of total loans outstanding (a portfolio) rather than on a
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.
Reserve levels will vary depending on target market
risk. Could be as high as 20% for certain markets
served by CDFI lenders.
Issues to Consider with Credit
Default definitions critical – 90 days/120
days is typical.
Assignability –credit enhancement should
travel with the loan upon sale of the loan.
ARRA Regulations and Context
DOE Encourages use of ARRA funds as
Loss Reserves, Sub/Senior Debt and loss
insurance are allowed uses of ARRA
Loan Guarantees are not allowable uses
of ARRA funds.
Reserve vs. Guarantees
Loss Reserves are provided contingent
upon availability of funds (eg. 5% of
Guarantees are available regardless of
Michigan Example of Loss
5% loss reserve based on the total
portfolio of loans that lender holds.
Lender would be able to recover up to
80% of defaulted amount (skin in the
Unsecured loan – although possibly tied
to a meter and disconnection threat.
For this, lenders willing to offer 5-7%
unsecured loans. (about ½ market rate).
PA Keystone HELP and CO
Example of Loans
Loss reserve set at 5% of outstanding
value available to lender.
Investor in this case is the State
Lender guarantees loans to Treasurer.
Results in leverage of 20x loss reserve
Senior/Sub Debt Structure -- WA State
Housing Authority (in process)
ARRA funds used to provide a
subordinated debt at 0% in amount of $1
million. This sub-debt absorbs first loss
(ie. before any losses accrue to senior
Reflows create a loss reserve.
Private investor funds provide $9 million
of senior debt (much more secure and
Loan Loss Insurance
Very limited availability of any loan loss
insurance now – used to be available in
Insurance that is available is quite
Not a recommended option at this point.
Default Rates Tend to be Low – these
results should guide level of
It’s not the HDTV purchase…
Criteria Used to Assess Credit Quality
1.5% Credit score of 640 minimum. Average score is 720
<1% Current on utility bill for at least 12 months; credit score considered
0% Current on utility bill for 12 months
<1% Current on utility bill. In business for at least six months.
Sempra <1% Account in good standing with non disconnect in previous 12 months;
applicant must have been a utility customer for at least 24 months. Default
leads to disconnection.
Without financing we can’t make our climate, energy independence or other goals.
Financing requires working with financial institutions in new ways.
And educating finance institutions in part through use of credit enhancements.
Credit enhancements, structured properly, provide significant leverage opportunity.