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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.

pkrajsa@afcfirst.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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