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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: 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. email@example.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?) 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-to- income 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 1 Merrian Fuller. 2009. Clean Energy Municipal Financing. UC Berkeley. http://piee.stanford.edu/cgi-bin/docs/behavior/becc/2008/presentations/19-6A-02- The_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 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 3 Peter Krasja. 2010. State Incentived Consumer Financing Programs. Accessed January 16, 2010 http://www.cleanenergystates.org/Presentations/CESA_EPC- AFC_1.22.10.pdf 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 Description Benefits & Barriers & Limitations Sources Tools Opportunities Tax Credit Various tax credits incent energy efficiency and renewable energy Advances reduces working Federal tax credits for most common home (Cohen et Advances technologies implemented during home energy improvements. capital building owners energy retrofit measures expired at the end al 2009) 6 The Department of Housing and Urban Development (HUD) require to make retrofit. of 2010 . facilitates Tax Credit Advances through State housing authorities Will not cover full (nor even majority) 5 and non-profit organizations . financing. Revolving Release loan underwriting standards. Contractually obliged to fund purchase EE improvement loans from lending institution meeting those standards. (Why not just make the loan oneself? Client servicing?) Example: NYSERDA Green Jobs Green New York program Energy Rolls financing for EE improvements into mortgage payments. May align with time-of-sale Limited market penetration thus far. (Cohen et Efficient energy efficiency Added time and complexity of EEM and al 2009) 4 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 Various EEM packages already exist, notably FHA Energy Efficient improvement policies associated home energy assessments at (EEMs) Mortgage Program, and the EnergyStar Mortgage. Fannie Mae time of purchase may limit homeowners 7 and Freddie Mac provide guidelines for independent loans. willingness to adopt EEMs FHA HUD initiated Title I Property Improvement Loan Insurance May provide opportunity for FHA PowerSavers loans may be an (LBNL PowerSavers program. Insures private lenders for up to 90% of loan. EE programs with limited administrative burden for homeowners. FHA 2010) Unsecured if less than $7,500; secured with property lien for capacity to market an does not allow ‘dealer loans’, so contractors 8 above. Fixed interest, negotiated with lender. outside financing program; cannot assist building owner with does not need to be application. Additionally, loan lag time developed in-house. between Fannie Mae High interest, non-securitized personal loan. Up to $20,000. Rapid approval timeline High interest rates Energy Loan Presuming high credit requirements Program On-Bill Utility collects surcharge on utility bill representing the monthly Consumer associates energy Utilities are hesitant to adopt traditional (Hinkle & Financing financing payments for EE improvements. savings and payments. banking functions for customers, and have Kenny Charging the meter, not had difficulties aligning their billing systems 2010) 10 Can be utility funded and solely adiminstered (eg. San Diego Gas consumer, avoids problems with the needs of home energy retrofits . & Electric); or utility is the collection vehicle, and funds organized if property is sold or rented. Financing periods are typically short term through bank debt, municipal bond, Federal/State/Municipality (about five years). Furthermore, utilities may 9 Grant, etc (e.g. Clean Energy Works Portland) 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. Property Treats EE as a tax-assessed property improvement. Payments Payments tied to the Hinkle & Kenny (2010) suggest that a large Assessed made through tax assessment. Funded through municipal bond, property; avoids problems if population of upper middle class Clean Energy or other sources. ~20 states passed enabling legislation prior to property is sold. homeowners seems required to make (PACE) summer 2010. Accommodates program effective. Requires many projects in Financing comprehensive energy the pipeline to justify public bonds; interim In summer 2010 Federal Housing Finance Administration, Fannie improvements. financing may be necessary to build market. Mae, and Freddie Mac expressed concern over the senior status of PACE liens over mortgages. Fannie and Freddie have stated Maine’s enabling legislation they will not purchase mortgages with such senior liens in the establishes a “notice of PACE 7 Steve Cowell. October 2010. Personal communication. 8 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 secondary mortgage market, effectively curtailing residential agreement” in its registry of 11 PACE Programs in most juridictions . Commercial PACE programs deeds, establishing a second continue in Sonoma County, LA, Washington DC and other mortgage and overcoming 12 13 jurisdictions. the senior lien barrier. 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 Description Strategic Considerations and Variables Financing Mechanism On-bill payments can either be associated with Tariff based programs have many advantages. They: Loans individual customers through loans, or the utility Overcome split-incentive barriers between tenants/owners, as Tariff meters through so-called “Tariffed Installation tenants pay financing. Installation Programs”. If tariffs are used, outstanding payments Can accommodate longer lending terms, as repayments will are passed to the next occupant (in rented properties) 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 or new owners (in the event of a sale). Conversely, the transfer to new occupants. (associated balance of personal loans must be paid when occupants Better accommodate termination of utility services in the 14 with meter) leave. Typically, this results in shorter financing terms event of a missed payment (see Security for more on this for loans. security measure) CHECK – quoted correctly, but may contradict other work] Tariff systems are an additional service charge, which Do not necessarily involve lendees assuming a debt obligation, must be approved by the Public Utilities Commission. making them attractive to people and institutions (like some 15 municipalities) for whom assuming debt may be difficult Cases Typically do not require program administrators to assume Two especially prominent residential EE upgrade duties of a lender under finance regulations, thereby avoiding programs use loans: associated fees and administrative duties. Pennsylvania Keystone HELP. Manitoba Hydro On-bill Loan. However Tariff based systems can be especially difficult to implement. They: Midwest Energy uses on-bill tariff for residential Require approval by the utility regulators, adding increased customers. complexity to their implementation. Program administrators 16 should promote benefits to regulators . Could pass along payments for portable equipment (refrigerators, etc) to new occupants that was removed by the 17 previous tenant . Or equipment may not be useful to new tenant (for example, if a restaurant was converted to dry cleaners). Program Administrator Some on-bill programs are administered solely by Having utilities serve simply as a repayment conduit for other Utility utilities (example: San Diego Gas & Electric). In these administrators has many advantages: 3 Party rd cases, utilities must assume the legal obligations of a Utilities have little experience in serving and creditors and Administration lender, as well as provide debt services and pursue administering debt. They are often reluctant to assume these recourse in the event of default. 14 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 st EEAC. May 2010. On-bill Repayment Working Group Report to the Energy Efficiency Advisory Council. Accessed January 21 , 2010. http://www.ma- eeac.org/docs/5.11.10/OBR%20Working%20Group%20Report%20to%20EEAC%20-%20Final%20May%2010%202010.pdf (Potentially: roles. 18 Lending In the case of third party administrators, the utility May avoid regulation under Truth in Lending Act – [CHECK]. institution, billing system serves merely as a conduit for payments State, Local to these administrators. The administrator or lending Government, institution assumes responsibility for much of the autonomous origination, debt servicing, and pursuit of defaulted agency, etc) loans. Administration Regardless of whether utilities assume administrative Changing billing systems and staff training can make utilities Billing Systems duties, utilities face difficulties in adopting on-bill wary of engaging in on-bill systems. Engage utilities early Utility loan systems: regarding the prospect of addressing these hurdles. servicing Different utilities use different billing Negotiating more senior status for financing repayments may Managing systems/software. Incorporating on-bill allow for better terms from lenders; this will likely be opposed partial payment into existing systems can be onerous by utilities [MAY BE TOO FAR OUT OF LEFT FIELD - KEEP?] payments for utilities, requiring substantial changes to systems. Utility customer service personnel require training and systems to handle inquiries regarding on-bill systems. 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 In utility administered programs, capital may be Using capital from outside of utilities has the following advantages: Utility sourced by utilities, or stem from a regulator approved It may be more flexible, allowing for financing programs to Other public benefit charge. serve riskier customers. It accommodate comprehensive retrofits more easily - Utilities Programs administered by other parties can access frequently only serve one commodity market (electricity, gas, many other funding sources. 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 18 th Matthew Brown. 2009. Models for Financing Clean Energy. Powerpoint presentation. Accessed January 14 2010, http://www.ma- eeac.org/docs/BrownPresentation_Financing_SWEEP110909.pdf consumption. Outside sources of capital can leverage savings from all utilities, allowing for comprehensive energy retrofits and deeper savings. Underwriting Criteria Utility bill payment history (for example, over last 12 Work to make financing accessible to lower-income and credit Utility bill months) can be used to qualify participants in program. customers. payment Use credit enhancements to broaden underwriting criteria history Pennsylvania’s Keystone HELP loan program for limits. FICO score, residential sector uses FICO score and debt-to-income debt-to- ratio as well. income, etc Regardless of underwriting criteria, default rates have been low in on-bill systems. Security Stipulations that customers be disconnected from Reasons to implement service termination security Utility service utility services if they do not make financing Lending institutions may be wary of making unsecure loans. termination repayments is sometimes used as a security provision in This may increase the cost of capital (EEAC 2010). Other on-bill financing. Other securities, such as a property securities lien, could be applied as well. Reasons against termination security Unsecured Utilities may be concerned with customer backlash Even those programs without a disconnection clause as Program optics, administration & legal costs associated with security have experienced low default rates - around 1- customers who contest termination 3% or less. It may be that having the loan repayment on May violate consumer protection regulations the utility bill is a sufficiently manageable repayment mechanism for most customers that disconnection Use documented low default rates in unsecured programs to test security provides minimal additional value. 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. 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 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 th Jeff Pitkin. January 11 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 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: 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: 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. 21 List derived from: John MacLean. January 15 2010. Structuring Loan Loss Reserve Funds for Clean Energy Finance Programs. Powerpoint Presentation. Energy Efficiency Finance Corp. 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: “Loan Loss Reserve Agreement - between the financial institution and donor EE Loan Program Agreement - between the FI & Program Administrator or Energy Services Providers” Guidance: 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: “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: 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? 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) 22 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: 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. 23 Clair Broido Johnson. 2009. Municipal Energy Financing. Power Point presentation, delivered June 1 2009. Notes Energy Efficiency Mortgages (Cohen et al 2009) - 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 - 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_EPC- AFC_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 - 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.
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