On-Bill Financing: Exploring the Energy Efficiency Opportunities and Diversity of Approaches

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1 On-Bill Financing: Exploring the Energy Efficiency Opportunities and Diversity of Approaches National Conference of State Legislatures: Everybody Wins Driving Economic Growth and Energy Efficiency with On-bill Financing February 20, 2014 Casey Bell ACEEE Washington, DC

2 Benefits of Energy Efficiency Saves customers and businesses money Improves building comfort and affordability Environmental benefits Drives economic development and job creation Resource for demand-side management Disaster risk management/energy security Potential low-risk investment opportunity

3 Common Energy Efficiency Barriers Split-incentives with multi-tenant buildings Neither the owner nor tenant wants to bear the cost of the retrofit because the other will gain Long lease lengths make it difficult to negotiate retrofits because parties prefer letting leases expire to amending existing leases Valuation Customers do not see the value in spending money to install EE upgrades Banks rarely consider energy efficiency investments when underwriting Competing investment priorities Buildings are required or urged by various entities to install systems, making environmental upgrades potentially a lower priority Upfront capital costs Limited debt capacity for Class B and C buildings Long payback periods Slide design by Stephanie Sienkowski

4 Financing Mechanisms Mechanism Upsides Downsides On-bill financing/on-bill repayment Property assessed financing (PACE) ESCO financing Energy service agreement (ESA)/Managed energy service agreements (MESA) Performance-based contracting Can be structured to follow the meter, decreasing upfront capital cost and stretching repayment out over a long period. No upfront cost, ability to transfer ownership, financing is off balance sheet. Provides turnkey project development. ESCOs assume technical and performance risks of projects. Mitigates high upfront capital costs and does not require enabling legislation. The investment fund pays for and installs the upgrades. No upfront capital costs. Repayment is calculated through savings. Availability is still limited and there is not much capital available for large projects. Best for small businesses. Needs significant regulatory support and standardization at the state level. MUSH markets are preferred because those buildings typically have stable energy loads and good credit. This relatively new structure. Potential legal ramifications of changes to FASB. Buildings with good credit are preferred for these projects. Slide design by Stephanie Sienkowski

5 On-bill Financing Allows utility customers to invest in energy efficiency improvements and repay the investment through an additional charge on their utility bill. Structured in numerous ways o o o o Loan Tariff Service Agreement Hybrid Models Serves an array of markets o o Residential Owner-occupied Rental Commercial and Industrial Small business

6 Current On-bill Landscape

7 Program Design Considerations Fundamental Program Objectives Target Market Selection of Program Administrator Financial Product Structuring Capital Source Secondary Credit Enhancements Customer Eligibility Requirements Project Eligibility Requirements Installation Marketing Additional Incentives

8 Program Objectives What do you want to accomplish? Motivating Factors (utility perspective) Manage Peak Loads Energy Savings Targets Enhance Customer Satisfaction Power Plant Avoidance Extend EE Funds to Underserved

9 Target Market(s) Goals Target Market Environmental Factors

10 Selection of Program Administrator Utilities CDFI s or Financial Services Providers Energy Service Companies Non-profits

11 Financial Product Structuring Type Tariff-based Financing Loan-based Financing Transferability Yes -- financing is assigned to the meter. Sometimes Debt Classification Not necessarily classified as debt. Classified as debt. Regulatory Approval Financing Term Required Could be useful for incentivizing deeper retrofits with longer repayment periods Not required. Work well with shorter repayment periods Bill neutrality?

12 Sources of Capital Utility Ratepayer Funds Shareholder Funds Public Grants (Federal, State, Local) e.g. Stimulus Public Loan Funds Bond Issues Revenue from Cap and Trade Programs Private Community Development Financial Institutions Local Banks & Credit Unions Large Commercial Banks & Capital Markets

13 Secondary Considerations Credit Enhancements Customer Eligibility Requirements Project Eligibility Requirements Installation Marketing Additional Incentives Rebates Lower Interest Rates No Money Down

14 Program Comparisons CEW OR Available Capital: 2011: $12 million 2012: $24 million 2013: $36 million Goals: Remodel 6000 homes by 2013 Participants: 599 loans (mid-2011) ECSC Pilot Available Capital: $1.5 $2 million Goals: Retrofit 100 homes Participants: 100 loans SBEA CT Available Capital: CL&P: $30 million UI: $7.5 million Goals: Comply with EERS and provide service to all customer classes. Participants: CL&P: 6,685 (since 2005) UI: 3,903 loans Value of Financing: $7.8 million Value of Financing: $1.5 million Value of Financing: CL&P: $17.3 million UI: $4.1 million

15 Program Comparisons (2) CEW OR Objectives: Customer Satisfaction Compliance HB 2636 Target Market: Residential (owner occupied and rental) Program Administration: CEW, Non-profit Structuring: Loan-based, transfer for $850 fee. 5.99% w/ 20 year repayment. Capital Source: Craft 3, CDFI ECSC Pilot Objectives: DSM, Customer Satisfaction Target Market: Residential (LMI focus) Program Administration: ECSC, Trade Association for State Cooperatives Structuring: Low-interest (2.5%) loan that follows the meter. Capital Source: USDA REDLG Program SBEA CT Objectives: Compliance with EERS, Expand Access to EE Funds, DSM Target Market: Small business customers Program Administration: CL&P and UI (IOUs) Structuring: Loan, no transfer Capital Source: Public benefits fund w/ revolving loan fund

16 Best Practices for State Policy Support Billing system overhaul Credit enhancement Managing dual fuels Allocating partial payments Peer connections Leading States New York Oregon California Connecticut Hawaii (OBR)

17 National Symposium on Market Transformation March 30 April 1, 2014 Hyatt Regency Baltimore, MD #ACEEEMT14 REGISTER NOW! ACEEE Energy Efficiency Finance Forum May 11 May 13, 2014 Capital Hilton Washington, DC Efficiency in the Age of Interconnectivity Who Should Attend: Policymakers Energy efficiency program implementers Local, state, and federal agency personnel Utility staff NGOs Energy efficiency professionals Consultants Behavioral scientists Building Momentum and Driving Demand Who Should Attend: Clean-tech and energy efficiency investors Financiers Utility staff Local, state, and federal agency personnel Energy service company personnel Policymakers NGOs Energy efficiency professionals

18 Questions? Casey Bell Senior Economist Finance Policy Lead ACEEE (p): (e):