Energy Efficiency Financing Models: Mortgage-backed EEF (EEM); Preferential Terms for Green Buildings; State/Municipal Loan Programs, and the Systems Benefit Charge; Sustainable Energy Utilities (SEUs); Carbon Market Funding; Property Assessed Clean Energy (PACE) - Commercial
My roommate pointed out re: this post that there are a number of different EE financing models currently being developed and recommended Capital-E’s incredibly detailed summary of the current EEF landscape. To process it all, I'm breaking the learning process down into digestible chunks.
Mortgage-backed Energy Efficient Financing (EEM)
The overview for EEMs is very simple. A property owner can roll their EE project into a new or refinanced mortgage to gain a number of benefits: the repayment period is matched with the length of the mortgage, effectively amortizing costs; energy savings are assumed to exceed the amortizing costs, increasing the borrower’s ability to pay and lowering their risk of default – this in turn can justify a lower interest rate; and the combination of EE and mortgage financing significantly reduces transaction costs.
Maine, New York, and Colorado each have ENERGY STAR Mortgage programs that buy down associated interest rates, but government involvement is not strictly necessary for EEM to be an effective tool for increasing residential energy efficient.
(The ongoing mortgage crisis will have a smothering effect on the refinancing side of things for the foreseeable future.)
Preferential Terms for Green/EE Buildings
In an ideal world, EE building would receive preferable terms for loans and mortgages since they have:
lower chances of building system failures, shutdowns;
higher operating incomes;
and higher health/productivity benefits for workers.
Making this a reality means collecting a wide body of evidence to that effect. That's a tall task, but the upside to this strategy is that it doesn't require new programs or bureaucracy, just the attention of investors.
State/Municipal Loan Programs
Similar to on-bill financing in that home-owners can pay back EE loans via their utility bills, these programs typically originate at the local level and are funded by a combination of federal grant money, rate-payer funds, bond issuance, and systems benefits charges. If states and municipalities can achieve the necessarily high degree of collaboration across departments, agencies, program administrators, and private contractors, this approach can concentrate expertise, opportunity, and funding in a single place -- DOE and EPA can offer key technical assistance in this regard. Close coordination can integrate significant job creation while certain program structures also facilitate access to outside capital.
Excellent examples include Portland's Clean Energy Works Program (CEWP), Pennsylvania's Keystone HELP, and the Texas LoanSTAR program. (The LoanSTAR link is particularly persuasive.)
The big knock on this approach is the frequently temporary nature of its funding -- see: ARRA -- though New York's successful and evolving utilization of a Systems Benefit Charge (SBC) shows how this hurdle might be overcome since SBCs remain stable apart from year-to-year fluctuations in state funding (18). For example, NYSERDA's New York ENERGY STAR Homes Program had accounted for 24% of new homes in the state as of September 2010 after an initial market penetration of 1% in 2001 (Appendix B, 11).
Sustainable Energy Utilities (SEUs)
Delaware's SEU is the go-to model, so let's start there:
The most important feature of the SEU is that energy users can build a relationship with a single organization whose direct interest is to help residents and businesses use less energy and generate their own energy cleanly. Directly put, the SEU becomes the point-of-contact for efficiency and self-generation in the same way that conventional utilities are the point-of-contact for energy supply.
• The SEU does not supplant other private-sector activities, but complements them by providing a focal point for energy efficiency and renewable energy information, expertise, and incentives. The SEU model will encourage inventors, adaptors and entrepreneurs to bring their innovations to the marketplace.
• The SEU is a public/private partnership that uses public funding sources and consumer savings, combined with private sector funds and management skills, to address the shortcomings of traditional approaches. (2)
The SEU takes care of pre-screening projects, establishes measurement and verification practices, and covers the incremental cost between conventional and EE projects. The project's ESCO then contracts with the customer to repay the loan, typically over 3-5 years.
SEUs are particularly promising thanks to their compatibility with secondary capital markets. In Delaware, the SEU worked with Citigroup to pool many of these projects and leverage the state's AAA rating to issue the nation's first EE tax-exempt bond. This prompted secondary investors to collectively invest $72M in the bond.
It seems like this model could enjoy wider adoption in better economic times, once state legislature's a more willing to commit to new state-wide bond authorities.
This model, predicated on the existence of a carbon market like the Regional Greenhouse Gas Initiative (RGGI) or California's pending market, would allow property owners who invest in EE projects to monetize the resulting CO2 reductions via the carbon market. It relies heavily on intermediary energy management and demand response firms like EnerNOC; because they already facilitate the measurement and aggregation of data on reduced emissions, the strategy envisions qualifying these DR firms to broker their customers' carbon offsets on the market. Aggregating data from many individual EE projects through a handful of qualified firms would ensure the savings, validate their market value, and provide the customer an immediate return on their EE investment.
Property Assessed Clean Energy (PACE) - Commercial
Where authorized by state law, local governments can fund EE projects for commercial, industrial, and 4+ family residential properties with long-term loans secured by a lien on the property and paid via a property tax surcharge.
Cap-E also cites the regional approach to PACE being explored by the Carbon War Room in which:
a Project Developer receives exclusive rights to market PACE financing within a particular jurisdiction;
a Credit-worthy Contractor implements an EE project and ensure the savings in conjunction with;
a 3rd Party Insurer who underwrites an insurance policy to back the guaranteed savings;
and a Capital Provider finances the projects with low interest-rate, short-term loans that can be bundled into long-terms bonds and sold to institutional investors.
They estimate that this regional approach, being tested in Sacramento and Miami, will finance around $650M in EE projects over the next few years (24).
The upside: because PACE attaches loans to properties, they can transfer with ownership and extend for longer terms, in turn allowing for more favorable terms and easier refinancing options down the line. Lower rates and longer terms also make these projects more cash flow positive. Sufficient scaling of commercial PACE projects could attract significant funding from institutional investors. And there are no FHFA run-ins because mortgage consent is required.*
The downside: mortgage consent can be difficult to secure and the program is only available to property owners. There are significant setup costs incurred by the municipality in establish PACE, setting a high bar for project costs ($2,500+, 25). In many instances, Class A building owners prefer self-financing.
*PACE residential went kaput thanks to FHFA protestations over the prioritization of liens.
