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WHITE PAPER
THE OPPORTUNITY FOR ENERGY EFFICIENCY FINANCING
PROGRAMS IN THE SOUTHEAST
MAY 2014
AUTHORS:
Timothy Block, Southeast Energy Efficiency Alliance
Ian Fischer, Clean Energy Solutions, Inc.
Steve Morgan, Clean Energy Solutions, Inc.
Jennifer Weiss, Environmental Finance Center at UNC-Chapel Hill
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CONTENTS
Introduction and Background ............................................................................................................... 4
1. SEEA’s Mission and Energy Efficiency Finance Goals ............................................................................ 4
1.1 Why is SEEA Engaged in Energy Efficiency Finance and Why Now? ............................................. 5
1.2 Report Objectives .......................................................................................................................... 6
2. Barriers to Energy Efficiency Financing ................................................................................................. 8
2.1 ACCESS to Financing ...................................................................................................................... 8
2.2 SMALL Portfolio Sizes .................................................................................................................... 9
2.3 Complex Decision-Making and Time Horizons ............................................................................. 9
2.4 Split Incentives Between Building Owners and Tenants............................................................. 10
2.5 Lack of Information ..................................................................................................................... 10
2.6 The Hassle Factor ........................................................................................................................ 11
3. The Southeast’s Experience with Financing Energy Efficiency Programs ........................................... 12
3.1 Types of Financing Programs ...................................................................................................... 13
3.1.1 Stand Alone, Conventional and Credit Union Loan Programs ............................................ 14
3.1.2 Stand-Alone Government Loan Programs .......................................................................... 14
3.1.3 Stand-Alone Utility Loan Programs ..................................................................................... 14
3.1.4 On-Bill Financing and Repayment ....................................................................................... 15
3.1.5 Property Assessed Clean Energy (PACE) ............................................................................. 16
3.1.6 Special Financing Programs Tailored for Market Subsectors ............................................. 16
4. The Attributes of Successful Financing Programs ............................................................................... 17
4.1 Attractive Terms in Interest Rates and Loan Durations .............................................................. 18
4.2 Seamless Application Process ..................................................................................................... 19
4.3 Linkage to Existing Debt Payments ............................................................................................. 19
4.4 Linkage to Additional Incentives ................................................................................................. 19
4.5 Strong, Credible Marketing Partners .......................................................................................... 20
4.6 Customized, Multi-Channeled Marketing Strategies .................................................................. 20
4.7 Able Program Administrators ..................................................................................................... 20
4.8 Mature and Competent Contractor Infrastructure .................................................................... 21
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4.9 One-Stop Contracting ................................................................................................................. 21
4.10 Program Incentives That Reward Comprehensiveness .............................................................. 22
4.11 Comprehensive Information Technology Platforms ................................................................... 22
5. Defining SEEA’s Role in Energy Efficiency Finance .............................................................................. 22
5.1 Potential Roles in Energy Efficiency Finance ............................................................................... 23
5.2 Potential Financing Alternatives ................................................................................................. 23
5.2.1 Partnership with Banks or Community Development Financial Institutions (CDFI) ........... 23
5.2.2 Southeast Energy Efficiency Finance Network .................................................................... 23
5.2.3 Partnership and Promotion of Government Finance Programs ......................................... 23
5.2.4 On-Bill Repayment (Partnership with Utilities) ................................................................... 24
5.2.5 Property Assessed Clean Energy (PACE) ............................................................................. 24
5.2.6 Valuation of Energy Efficiency Improvements in Building Assessments ............................ 24
5.2.7 Green Banks ........................................................................................................................ 24
5.2.8 Administrative “Hub” for Energy Efficiency Financing. ....................................................... 25
5.2.9 SEEA-Branded Revolving Loan Fund ................................................................................... 25
5.2.10 Qualified Energy Conservation Bonds (QECB) .................................................................... 25
5.3 Key Evaluation Criteria ................................................................................................................ 26
6. SEEA’s Role in Financing Energy Efficiency ......................................................................................... 28
6.1 Southeast Energy Efficiency Finance Network............................................................................ 28
6.2 Partnership and Promotion of Government Programs............................................................... 29
6.3 On-Bill Repayment (OBR) ............................................................................................................ 29
6.4 Property Assessed Clean Energy (PACE) ..................................................................................... 30
6.5 Valuation of Energy Efficiency Improvements in Building Assessments .................................... 30
6.6 Potential Sources of Revenue ..................................................................................................... 31
7. Conclusion and Next Steps .................................................................................................................. 31
7.1 Issue Request for Proposals (RFP) for Remaining DOE Grant Funds .......................................... 31
7.2 Establish Framework for Southeast Energy Efficiency Finance Network ................................... 31
7.3 Develop educational materials and technical support for areas of focus .................................. 32
7.4 Potential Implementation Timeline ............................................................................................ 32
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INTRODUCTION AND BACKGROUND
In the fall of 2013, the Board of Directors for the Southeast Energy Efficiency Alliance (SEEA) approved a
staff recommendation to undertake two important and timely tasks affecting the financing of energy
efficiency (EE) measures for building owners:
1. Help define SEEA’s overall role in the energy efficiency financing space; and
2. Recommend how best to leverage the approximately $700,000 remaining in the Better
Buildings Neighborhood Program (BBNP) in a way that is consistent with the first
objective.
SEEA President Mandy Mahoney assigned Director of Programs Tim Block to lead this effort, assisted by
the University of North Carolina’s Environmental Finance Center (EFC) and Clean Energy Solutions, Inc.
(CESI). Both organizations were instrumental in providing SEEA with financial advice and technical
assistance during the course of the American Recovery and Reinvestment Act of 2009 (ARRA)-funded,
$20 million BBNP grant awarded by the U.S. Department of Energy (DOE) in 2010.
As part of this effort, SEEA established financing partnerships with lending institutions in 13
southeastern communities (sub-grantees). These partnerships deployed grant dollars as either direct
capital for loans, loan loss reserve funds, and/or dollars to buy down interest rates. As of last summer,
SEEA’s Board decided to reallocate its remaining DOE funds to a dedicated financing initiative. DOE has
set a deadline of June 2014 for repurposing those funds towards an impactful, innovative financing
program in the Southeast.
1. SEEA’S MISSION AND ENERGY EFFICIENCY FINANCE GOALS
SEEA was established in 2006 to drive market transformation in the Southeast’s energy efficiency sector
through collaborative public policy, thought leadership, programs, services and technical advice in 11
southeast states – Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Virginia.
In April 2009, SEEA was awarded a $20 million grant from the U.S. Department of Energy (DOE) to
create, launch and scale up residential energy efficiency programs in the Southeast. In 2011, as part of
DOE’s Better Buildings Neighborhood Program, SEEA used the funds to support lending and other
financing initiatives for 13 southeastern cities. The goal was to create long term, sustainable energy
efficiency programs and public-private partnerships with lending institutions in each community to
provide residential energy efficiency retrofit financing.
In 2013, SEEA outlined three goals for continued expansion and innovation in the energy efficiency
finance market:
1. Support the development of creative financing options for energy efficiency in the Southeast.
2. Increase energy efficiency investments through emerging financing tools as a result of
educational efforts and policy changes.
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3. Leverage current energy efficiency bank contracts to develop a larger SEEA-branded innovative
financing mechanism.
This background provides guidance for the current work and recommended initiatives.
1.1 THE RATIONALE FOR SEEA INVOLVEMENT IN ENERGY EFFICIENCY FINANCE
SEEA assumed a central role in financing for its 13 local BBNP sub-grantees across the region in 2010 –
and continues its commitment today after the DOE grant has ended – for two reasons. The first was the
significant leveraging impact financing can have on building owner investments in energy efficiency, and
the second was the difficulty that all sub-grantees experienced in crafting financing programs that
appealed to homeowners enough to gain significant uptake in the marketplace.
While many energy efficiency advocates across the country erroneously perceive financing to be the
“Holy Grail” that will trigger billions of dollars in building owner investments, the availability of financing
is still a critical component in achieving comprehensive and widespread building retrofits.1 In the
Southeast, which does not enjoy the level of utility incentives found in other regions of the country,
financing tools offer the opportunity to jump start energy efficiency investments, and can cover most (or
all) of the large gap that exists between available subsidies and total project costs.
The data from SEEA’s April 2013 BBPN report to its board of directors outlining the results from the
BBNP financing program reveals that seven of the 13 sub-grantees had closed loans of $1.6 million, and
had leveraged another $10 million from owner contributions and utility or government subsidies.2
These financing programs included both stand-alone, targeted financing from banks under the U.S.
Department of Housing and Urban Development (HUD)’s residential PowerSaver program, and
residential and small commercial lending from partnering financial institutions supplemented with loan
loss reserves in some locations. This summary did not include data from the Charlottesville, VA program,
which partnered with a local bank to make over 150 PowerSaver residential loans.
While the financing deployed through the BBNP is evidence of impressive leveraging and a
commendable overall investment, it represents only a “drop in the bucket” when considering the low
participation rates among the affected communities. Specifically, it represents far less than one percent
of eligible building owner opportunity, and in the most successful communities—Jacksonville, New
Orleans, and Charlottesville—it represents 15 percent of total investment by program participants.
SEEA’s efforts, which included a) providing technical assistance to recruit lenders, b) offering marketing
assistance to promote the lending programs, and c) advising on credit enhancement vehicles, were
successful in providing its sub-grantees with the tools needed to roll out successful energy efficiency
programs. The independent BBNP process evaluation, conducted in the summer of 2013 by the Cadmus
1 See especially, “The Limits of Financing for Energy Efficiency”, Merrian Borgeson and Mark Zimring, Lawrence Berkeley Laboratory, August, 2012, American Council for an Energy Efficient Economy Summer Study.
2 April 17, 2013 Power Point, “SEEA’s Current EE Financing Initiatives, Report to the Board of Directors, pp7-8.
6
Group highlighted these successes, while also reporting “mixed success” from participating lenders.
Although all programs were able to leverage the BBNP funds to drive economic and job growth, none of
the programs achieved the scale—300 percent of actual results-- hoped for by program designers and
lenders who participated.3
SEEA'S BBNP FINANCING PROGRAMS
CITY
CONTRACT
VALUE
FINANCING
MECHANISM
# OF LOANS TO
DATE
CURRENT LOAN
VALUE
Chapel Hill, NC $150,000 PowerSaver Loans 0 0
Charleston, SC $200,000 PowerSaver Loans 0 0
Charlotte, NC $200,000 Direct Loans 1 $11,129
Jacksonville, FL $200,000 Loan Loss Reserve 226 $1,576,779
Nashville, TN $235,000 Loan Loss Reserve 0 0
New Orleans, LA
(Residential) $315,000 Loan Loss Reserve 14 $80,958
New Orleans, LA
(Commercial) $300,000 Loan Loss Reserve 0 0
1.2 REPORT OBJECTIVES
In this report we examine the underlying barriers and drivers of successful efficiency programs,
deliberate upon what financing roles are most appropriate for SEEA involvement going forward, and
make recommendations about how to best allocate the $700,000 of remaining DOE funds for use in the
financing of energy efficiency programs in the second half of 2014.
Section 2 examines the current barriers to energy efficiency financing. Although financing offers great
leveraging potential, it is very difficult to design and deliver successfully. This report examines the
accompanying challenges of energy efficiency financing in some depth. A sophisticated knowledge of
the obstacles helps inform solutions that may mitigate or overcome these challenges.
3 The Cadmus Group, “Process Evaluation” of SEEA BBN Program, July 2013, pp 22-23.
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Section 3 offers a summary of the Southeast’s experience with financing more broadly. The categories
of lending that we examine in this section cover the breadth of both traditional and emerging
instruments:
Stand-alone private lenders;
Stand-alone, government or non-profit organization-provided programs;
Stand-alone utility loan programs;
Utility on-bill financing or repayment;
Property Assessed Clean Energy (PACE) for commercial buildings;
Energy efficiency mortgages;
Energy performance contracting financing;
Other programs, including contractor financing, equipment financing and gap financing for
special markets.
Section 4 explores in greater depth the program attributes necessary to create and deliver energy
efficiency financing programs that can achieve significant residential, commercial, and/or institutional
building owner uptake, and result in sustainable returns for the participating lenders. Successful
programs are linked not only to the elements of the financial offering, but also to a) the definition of
eligible participants and energy efficiency measures, b) the strength of a program’s marketing strategy,
c) the quality and credibility of marketing partners, d) the attributes of the contracting infrastructure, e)
the availability of other funding sources, f) the capability of the information technology platform, and g)
the other non-financing attributes.
Based on the analysis provided in sections 1 through 4, Section 5 narrows the range of financing
opportunities to ten feasible options, and applies them based on SEEA’s mission and the energy
efficiency needs and opportunities of the southeast region. These options are further refined based on
SEEA’s internal resources and capabilities in order to identify the most appropriate role for SEEA to play
within the financing space. Consistent with the mission articulated in SEEA’s 2014 strategic plan, the
particular role or roles SEEA can best play in the innovative finance space may be summarized as
follows:
Policy Advocate;
Industry Convener;
Knowledge Transfer (“Best Practices”) Provider;
Program Designer for Lenders;
Technical Assistance Provider / Educator.
Section 6 summarizes the most appropriate financing opportunities for SEEA to undertake, and makes
recommendations on the types of financing programs and appropriate roles for SEEA to play. These
opportunities span the list of financing vehicles and also their sponsors, partners and other supporters.
Given the strong linkage between successful financing programs and successful energy efficiency
program participation levels, it is important to cast a “wide net” in this narrowing of options and
generation of recommendations.
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Section 7 discusses possible implementation steps for SEEA, and provides a guide to harnessing today’s
plan and resources to achieve tomorrow’s successful financing program outcomes. Detailing quarterly
tasks, milestones and partners is an important process. The implementation timeframe is also
important. Given the emergence of potential game-changing financing mechanisms, including on-bill
repayment and PACE, defining near-term (two to three years) and longer-term (three to five years) roles
for SEEA to play makes sense. These roles and timeframes must be evaluated in the context of criteria
developed for the organization, taking into account such variables as staff capacity and the likelihood
and sources of funding. The completion of this task should enlist the entire Advisory Committee and
engage the SEEA staff and board to design a meaningful roadmap with which to proceed.
2. BARRIERS TO ENERGY EFFICIENCY FINANCING
Regardless of whether investment in energy efficiency involves debt or equity, there are some common
obstacles to financing which are closely related to the barriers to investing in energy efficiency generally.
The national and regional experience with energy efficiency financing is anemic in the context of overall
lending4, and the volume of stand-alone energy efficiency investments is similarly very small relative to
the total amount spent on home improvement or commercial building retrofits, assuming one exempts
replacement HVAC systems from the former category. The obvious corollary is that successful financing
programs will display an array of accompanying attributes that address target markets, marketing
messages and strategy, marketing partners, associated financial incentives, competent and credible
program administrators, one-stop contracting, and easy-to-use information technology platforms that
link lenders to contractors, program administrators, and customers. This complement of attributes is
necessary to address and mitigate the barriers described below, and are outlined in detail in Section 4.
2.1 ACCESS TO FINANCING
For large numbers of both residential and commercial building owners, access to affordable financing is
a major hurdle. The obstacle is most acute for low and moderate income homeowners, renters, small
business owners and non-profit organizations. For homeowners, low credit scores, high debt- to- income
ratios on existing mortgages, and low cash balances affect both their ability and willingness to borrow.
The recent economic recession, with its mortgage foreclosure crisis, exacerbated these problems and
resulted in tightened underwriting criteria for lenders.
In the commercial sector, the credit-challenged candidates who stand out most are new businesses,
small businesses, and large office buildings occupied primarily by tenants. Many of these buildings and
their occupants have problematic balance sheets, as retail businesses slowly recover from their
economic woes, and office buildings have recently experienced higher vacancies, lower rents, declining
equity, and shorter cash positions. In addition, some commercial buildings face significant barriers to
investments in energy efficiency, even in the best of times. In a sluggish economic climate, these
4 See especially Borgeson and Zimring, ibidem.
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barriers are even greater. Ironically, the most attractive candidates for financing in this environment are
institutional and government buildings. Although this group of building owners is always strapped for
cash, they are on the receiving end of government subsidies and tax-exempt debt in the current healthy
energy performance contracting marketplace.
Another persistent irony in this situation is that conventional banks are eager to lend to creditworthy
homeowners, and also to commercial owners who already have access to alternative and less expensive
financing resources. However, neither group is especially interested in borrowing. Conversely, there are
many resource-limited homeowners, businesses, and nonprofits who do need financing, but who are
unable to meet bank underwriting requirements. While mission-oriented lenders, including community
development banks and credit unions, have stepped up to meet a critical need for affordable energy
efficiency loans, even with their more relaxed credit requirements, only a fraction of potential
borrowers are able to take advantage of their offerings. This is because these borrowers are unable to
meet even the most relaxed credit requirements. However, this problem can be successfully addressed
with government loan guarantees and loan loss reserves.
2.2 SMALL PORTFOLIO SIZES
There are no existing energy efficiency lending programs sizable enough to be sold into secondary
markets. Secondary markets are wholesale financial providers that purchase hundreds or thousands of
mortgages and other retail lending products for a discounted price, and hold or resell them to other
investors. Pennsylvania’s residential loan program, which is sponsored by the state Treasurer’s Office
has tried for three years to “warehouse” or sell its loan portfolio into the secondary marketplace. While
Pennsylvania has succeeded in creating a limited secondary market, it has struggled to convince the
secondary financing market to purchase its $20 million loan portfolio.
For conventional lenders, achieving loan volumes of $50 to $100 million for resale into the profitable
secondary market is a major objective for any of their products. While data is limited, we have anecdotal
evidence that 95 percent of the three hundred or more stand-alone energy efficiency financing
programs in the U.S. have failed to reach even $25 million in volume over any three to five year period.
This results in a classic chicken-and-egg dilemma: the absence of demand for energy efficiency lending
inhibits conventional lenders from offering and aggressively marketing energy efficiency financing that
includes attractive interest rates and longer loan repayment periods. The shortage of attractive
programs, in turn, dampens demand. While this dilemma is most acute in the residential sector, it is also
a reality in the commercial sector. Refinancing and equity loans are still more appealing to both
residential and commercial borrowers than stand-alone energy efficiency loans, which further restrains
significant growth of energy efficiency lending.
2.3 COMPLEX DECISION-MAKING AND TIME HORIZONS
While not an issue for homeowners, commercial, non-institutional building owners, such as insurance
companies, pension funds and labor unions, have complicated or multi-layer decision-making structures.
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Energy efficiency program managers must first convince property management companies, then general
partners, and then limited partners of a loan’s value in order to gain approval for financial investments
above a prescribed minimum, such as any improvement costing over $10,000 per property.
Each of these three groups has different financial interests and varying time horizons. Limited partners
generally operate on a timeline of three years or less, which means applicable energy efficiency loans
must be paid back within this timeframe. These kinds of partners often like to flip their buildings, or take
out their equity within three years. Except for common area lighting, water conservation measures and
some controls, there are few energy efficiency measures that achieve payback in this timeframe. In
addition, the six-month to one-year time lag between an energy audit and receipt of a final decision to
proceed adds a transaction cost that many contractors are unwilling to take.
2.4 SPLIT INCENTIVES BETWEEN BUILDING OWNERS AND TENANTS
A major issue inhibiting potential borrowers with non-owner-occupied buildings is the split incentives
among owners and tenants. A split incentive means that one party owns the equipment generating
energy savings, while a different party enjoys the reduced utility bills, thereby undermining the owner’s
motivation to invest in the highest efficiency—and generally more expensive—equipment. Whether a
building has one master energy meter or is individually metered, within its tenant group, there will exist
varying attitudes and motivations around utility usage and utility cost reduction. Owners are reluctant to
invest in energy efficiency when their bill-paying tenants reap most of the benefits; tenants lack
motivation to reduce their energy use when the owners are responsible for utility bills. Residential
buildings are less hampered by these issues than commercial buildings, as their lease structures are
often more uniform. However, in commercial buildings, especially office buildings, the barriers to energy
efficiency are harder to resolve due to the frequent mismatch of metering to tenancy, and to varied
lease structures.
2.5 LACK OF INFORMATION
A problem common to both homeowners and large building owners is a lack of information about a)
energy efficiency technologies, b) the track record of energy efficiency measures, and c) the expertise of
contractors. Given that comprehensive retrofits generally require the services of multiple contractors to
address the installation requirements of multiple measures, this lack of information presents a sizable
challenge to progress. While the sophistication and knowledge level of an owner will help to mitigate
this issue, even facility managers show skepticism, uncertainty and large information gaps when
considering energy efficiency retrofits. As a result, many potential candidates for energy efficiency loans
simply fail to proceed.
There are two obstacles to energy efficiency borrowing that are especially noteworthy. The first is the
ubiquitous lack of respected sources of energy efficiency expertise. In almost all cities, investor-owned
utilities are not well liked or respected as credible advisors, in part because they are primarily in the
business of selling the very fuel an owner is trying to use less of. The second challenge is the scarcity of
energy efficiency case studies, documented evidence and proof of what works, particularly for large
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buildings. There is also a wide absence of credible, long-term data on the relationship between specific
energy efficiency investments and how these impact a building’s energy usage.
This absence of information is due to many factors, including weather, building function, occupancy,
metering configurations, the introduction of new energy-using equipment and the expertise of the
building maintenance staff, to name but a few. To achieve credibility, a case study of energy investment
and savings must be associated with some level of uniformity of building type, for example a restaurant,
a small or large office building, a warehouse, a recreational facility, etc. Widespread uncertainty about
energy savings for specific types of buildings handicaps building owners who may otherwise be
interested in an energy efficiency loan. It also hampers lenders’ efforts, as without standardized
performance metrics, they remain unwilling to credit utility savings as an offset against debt service
payments.
2.6 THE HASSLE FACTOR
An additional challenge associated with a lack of information about energy efficiency technology,
contractors and program results is the “hassle factor” of these loans. This problem affects both lenders
and contractors as an energy efficiency retrofit requires the services of multiple contractors in order to
be of a sufficient scale to warrant borrowing in the first place. The process of applying for financing may
also be a constraint— especially for homeowners.
Unless the loan application form is simple and straightforward, easily accessible and reviewed by a
lender within a couple of days, many homeowners will lose interest and fail to close their loan. While
evidence for the extent of this obstacle is difficult to find, there is anecdotal evidence from the MASS
SAVE Program in Massachusetts. MASS SAVE found that by simplifying the loan application form,
presenting it at the time of an energy auditor’s visit, and reducing the application review period to one
day, the number of applications from borrowers increased and resulted in a tripling of the number of
applications it was able to process.5
As a group, these obstacles to energy efficiency lending are substantial. Even long-time energy efficiency
industry participants state they are humbled by their breadth of understanding of these problems and
their complexity. However, recent innovations in financing instruments are beginning to inspire new
optimism. We will turn to those activities in Section 4.
5 Author interview with Steve Cowell, Conservation Services Group, administrator of MASS SAVE, the utility-sponsored energy efficiency residential audit, implementation and financing program for the state, April, 2013.
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3. THE SOUTHEAST’S EXPERIENCE WITH FINANCING ENERGY
EFFICIENCY PROGRAMS
State and local governments around the country have recognized the importance of energy efficiency
programs in their jurisdictions and many have established target goals for reductions in energy use. As a
way to motivate building owners to invest in energy efficiency improvements, loan programs have been
developed by public and private funders to make it possible to offer attractive financing alternatives that
can be used to complete projects.
As part of this evaluation of programs for SEEA, The Environmental Finance Center has collected data
from the Department of Energy, the Database of State Incentives for Renewables and Efficiency (DSIRE)
and the American Council for an Energy-Efficiency Economy (ACEEE) and has put together an Excel
database of energy efficiency loan programs throughout the United States with a focus on programs in
the southeastern United States. Although this database does not include all of the loan programs
currently available to building owners – omitting those programs offered by private investors – it can
help SEEA and its partners a) to understand the trends in the market, b) to identify gaps in sectors, and
c) to recognize states in the SEEA territory that might warrant additional attention.
This 50-state database identifies 318 energy efficiency loan programs. The states with the most loan
programs include California (21), Oregon (16), Pennsylvania (14), Minnesota (14), and Wisconsin (14).
Figure 1: Energy Efficiency Loan Programs in the Southeast United States, by State
Of the loan programs identified, 77 are offered in the Southeast, with North Carolina (12), Florida (10),
Georgia (10) and Alabama (10) leading the pack.
Tennessee 6% Virginia
4%
Alabama 13%
Arkansas 8%
Florida 13%
Georgia13%
Kentucky 10%
Louisiana 5%
Mississippi 4%
North Carolina 16%
South Carolina 8%
SOUTHEASTERN LOAN PROGRAMS
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Each loan program focuses on one or more sectors. The majority of the programs in the Southeast apply
to the residential single family (59), residential multi-family (59) and small commercial (31) sectors. Fifty-
four percent of the programs are traditional stand-alone loan programs (including several government-
offered revolving loan funds); 40 percent are on-bill financing; and the remaining six percent are
commercial PACE programs. Data on the number of loans and dollar volumes of these loans is not
readily available.
Unfortunately, beyond the SEEA BBNP lending programs summarized in Table 1, there is almost no data
available on the lending activities of the remaining 68 programs in the Southeast. Surprisingly, many
lenders report their results have not yet been tabulated by their administrators. One reason for this
absence of data is likely the very limited number of loans that have been closed. State and municipal
revolving loan programs do report results, and their episodic disclosures reveal activity below $5 million
per year for even statewide programs.6
3.1 TYPES OF FINANCING PROGRAMS
A quick tour of the Southeast to review existing categories of financing programs offers a better
perspective on current financing opportunities. We report here on those programs dedicated to energy
efficiency lending only, and provide anecdotal information on their performance. We also summarize
the specific measures typically addressed by these offerings.
6 Interviews with state energy offices in Virginia, South Carolina, and North Carolina, Fall, 2014.
0
10
20
30
40
50
60
70
ResidentialSingle Family
ResidentialMulti-Familty
SmallCommercial
Municipal Non-profit School
SOUTHEASTERN LOAN PROGRAMS
Figure 2: Energy Efficiency Loan Programs in Southeast United States, By Sector
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3.1.1 STAND ALONE, CONVENTIONAL AND CREDIT UNION LOAN PROGRAMS
Other than HUD’s PowerSaver residential loan program, which was offered by several SEEA sub-
grantees, there are few residential or small commercial lending programs enhanced by federal
government sponsorship or support.
The PowerSaver loan has had disappointing uptake in the region and nationwide, with fewer than
5,000 participants reported by the BBNP sub-grantees across the Southeast. Backed by FHA
insurance, the PowerSaver offers unsecured loans of up to $25,000 for a prescribed list of energy
conservation measures, for terms up to 10 years. Eighteen regional and national banks initially
offered the PowerSaver loan, and interest rates were generally in the six to nine percent range,
depending upon homeowner credit ratings. The loans were heavily promoted by home performance
contractors, and enjoy an interest rate advantage 200-400 basis points better than most competing
unsecured residential loans.
Other dedicated energy efficiency loan programs offer both secured and unsecured products, with
the latter being 300-500 basis points higher in price. Eligible customers are either residential or
small commercial – less than 100 employees is typical – and terms are generally limited to seven to
ten years. These relatively short loan terms render unlikely the prospect of debt service offsets
from utility savings. Loans offered by credit unions enjoy slightly lower interest rates and more
relaxed underwriting criteria. Most of these are restricted to residential homeowners.
For all lenders, the range of single family loans is generally $5,000 to $15,000. These single family
energy efficiency loans compete with cash and credit cards, especially at or below the bottom of the
range. At the top of the range, they compete with equity loans. As mentioned previously, equity
loans generally offer better interest rates. For commercial customers, $15,000 to $50,000 is a typical
range. Participation for the vast majority of these programs rarely surpasses a few hundred
customers per year.
3.1.2 STAND-ALONE GOVERNMENT LOAN PROGRAMS
Many of the southeast states offer residential and small commercial customers revolving loans at
below-market interest rates of three to six percent, and these were frequently funded by DOE ARRA
grants. A few of these programs have been in place for more than five years and have benefitted
from state legislature appropriations. The pools range from $2M to $10M, and terms may extend to
ten years. Typical loan sizes mirror those of conventional stand-alone offerings. Both energy
efficiency and renewable energy system loans are generally available to building owners. As is the
case with private lending products, most languish from minimal marketing and a lack of customer
awareness. The absence of an associated contractor network also plagues many of these programs.
3.1.3 STAND-ALONE UTILITY LOAN PROGRAMS
Several investor-owned and a few municipal utilities have partnered with credit unions and banks to
offer energy efficiency programs for residential and/or small commercial customers. However,
unlike on-bill financing and on-bill repayment, their loans are not represented as line items on the
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utility bill. The JAX Metro Credit Union program is a prominent example; it also featured a loan loss
reserve, provided by the SEEA BBNP subcontract.
While some of these programs are enhanced with utility funds to buy down interest rates, most are
stand-alone private lender-sourced instruments. Typically the utility will set the program
parameters, specifying eligible measures and providing subsidized or no-cost energy audits. The
utilities depend upon their energy auditors to promote the financing program. A few are skilled
promoters; most are not, and lack any financial incentive to become so. The JAX Metro Credit Union
program, with more than 150 closed loans, has demonstrated success by forming a partnership
between lenders, contractors and utilities.
3.1.4 ON-BILL FINANCING AND REPAYMENT
Utility financing that appears as a line item on a customer’s utility bill is no longer a rare offering to
residential and small commercial customers - there are more than 45 in the southeast region. For
many, the terms of these loans are set such that loan repayments are roughly matched to predicted
savings, up to ten years. These offerings are sometimes subject to regulatory commission avoided-
cost tests and may use ratepayer funding to support their loans, thus limiting the range of eligible
measures possible, and the size of the loans that can be offered. Most of these programs are
accompanied by utility incentives for eligible measures, and the loan is offered so that a customer
can make an energy efficiency investment with no out-of-pocket costs. Originally, many of these
programs were offered by both electric and gas utilities to facilitate the leasing of hot water heaters
and other appliances; they were not intended to be energy efficiency offerings. However, these loan
types have since been expanded to cover a wider range of measures, including energy efficiency
improvements.
Historically most of these programs are offered to small commercial customers at interest rates
ranging from zero to five percent, with payback periods after the utility incentive of two years or
less. In addition to customer ease of access to these programs, on-bill programs offers two
additional advantages for customers: 1) underwriting is more relaxed and focuses largely on utility
bill-paying histories; and 2) renters who pay their own utility bills are eligible. There is a third benefit
associated with a subset of these programs, and it is that the loan stays with the electric meter and
is passed on to a new building owner when the building is sold. This is known as a “tariff” OBF
program. The controversial flip-side of the relaxed underwriting characteristic of these loans
however, is that the utility maintains the right to shut off electric service if a customer does not pay.
Utility on-bill “repayment” is the term given to loans that are repaid through a customer’s utility bill,
but with funds provided by private lenders. Such programs are not subject to stringent state
regulatory approvals, address a much wider set of measures (including those that save non-utility-
provided energy), and have greater flexibility of terms. The Southeast is just now beginning to
consider this new kind of loan offering.
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3.1.5 PROPERTY ASSESSED CLEAN ENERGY (PACE)
PACE, sanctioned by state law, provides local governments with the option to create a special
purpose assessment for commercial building energy efficiency improvements via assessments on a
building owner’s property tax bill. Modeled after other special purpose tax districts for public
improvements ranging from sidewalks to sewage treatment plants, PACE is unique in its ability to
handle individual commercial taxpayers, its acceptance of third party financing, and its ability to
append an energy efficiency loan to a property tax assessment.
In addition to the ease of access to financing for the building owner, PACE offers longer-term
financing—typically 20 years—that stays with the building even after it is sold. The lengthy loan
term is tied to a requirement that annual savings meet or exceed debt service requirements, which
provides a positive cash flow to most building owners.
Many localities have passed bonds to offer low-cost financing in the five to seven percent range,
which is competitive with alternative forms of debt. These features of the program qualify PACE as
potentially game-changing because it offers the potential for significant participation rates and high
loan volumes, both of which are missing from all but a few of the current financing programs.
Unfortunately the Federal Housing Finance Agency (FHFA) has ruled that residential homeowners
cannot currently participate in PACE programs due to the programs’ potential impact on existing
mortgage holders. While many expect the FHFA ruling to change, the issue of lender consent for
this new debt is an ongoing issue for PACE communities.
Nationally 27 states have enacted PACE legislation, including Virginia, North Carolina, Georgia,
Florida, Louisiana and Arkansas. Although nearly $56 million in commercial PACE projects has been
executed for more than 200 projects nationwide, the majority of lending activity has been centered
in nine states7. Several states must pass further modifications to help lenders and local governments
become more comfortable with PACE’s default risks and impacts on primary mortgage holders. Over
the next two years, we anticipate hundreds of millions of dollars in PACE investments as this
financing model gains traction. The Southeast will be a modest participant in this expansion in the
short run; however, its long-term PACE prospects are strong.
3.1.6 SPECIAL FINANCING PROGRAMS TAILORED FOR MARKET SUBSECTORS
There are at least four additional specialized financing products available, or soon to be available, in
the marketplace:
Energy efficiency mortgages for multi-family affordable housing owners;
Municipal leases and other tax exempt debt instruments for energy performance
contracts serving the public and nonprofit sectors;
7 PACE Market Snapshot, December 2013, PACENow, http://pacenow.org/wp-content/uploads/2013/12/12.17.2013-PACE-Market-Overview.pdf, accessed 2/13/14.
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Lender financing associated with HVAC and home performance contractors for energy
efficiency replacements; and
Gap financing for commercial and multifamily buildings.
The first three of these specialized programs are currently offered in some parts of the Southeast.
The Federal Housing Administration is now piloting an energy efficiency mortgage product for new
construction and major retrofits of affordable housing buildings. Although it is not yet widely
available, the energy efficiency mortgage program would permit higher “debt to value” ratios than
typically required, resulting in larger loans that can be used to pay for energy efficiency upgrades.
The concept might also be attractive to state housing finance agencies who lend to building owners
seeking major retrofits.
The nation’s major energy services companies arrange financing for an estimated $300-400 million
annually for schools, hospitals, local governments and universities in the region. Most of this is in
the form of municipal leases. AFC First is the lender of choice in several southeast communities for
home performance and HVAC contractor-generated loans to improve home envelopes and HVAC
systems. Because it offers a descending scale of interest rates tied to more comprehensive
measures and greater utility savings, this program has been successful in financing homeowner
HVAC replacements, but only modestly successful in driving demand for multiple measure,
comprehensive retrofit packages.
Gap financing, such as that provided by the New York City Energy Efficiency Corporation, is a
sophisticated financing program that customizes each building loan according to the debt
limitations, energy efficiency opportunities, and other sources of grant and debt financing available
for major building retrofits. The gap financing model is not currently offered in the Southeast.
4. THE ATTRIBUTES OF SUCCESSFUL FINANCING PROGRAMS
While we have identified more than 300 energy efficiency financing programs in the U.S., only a select
few have all the desired characteristics of a successful financing program: a) high total loan dollar
volume, b) high participation rates, c) a comprehensive offering of measures, and d) attractive
participant loan sizes. The few programs that achieve these characteristics have a consistent set of
attributes, and while few programs include all of the attributes, they each contain several, and they are
not bounded by the terms and accessibility of the financing itself.
The following list of attributes, which apply to both residential and commercial customers, has been
identified from the authors’ exposure to academic papers, conference presentations, telephone
interviews and direct experience in establishing financing programs over the last four years.8 Please note
8 Four ACEEE Conferences, the 2010 and 2013 Financing Conferences, 2012 Summer Study, and 2013 Energy Efficiency as a Resource Conference provided many of the panel presentations and narratives. Teleconference interviews by CESI for the Greater Cincinnati Energy Alliance during 2010-11 while advising the establishment of
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that this list of attributes has not yet been confirmed by regional or national evaluations. We look
forward to formal evaluations that confirm or modify our conclusions over the next couple of years. The
bundled attributes include:
Attractive, below-market interest rates and loan terms of seven years or longer;
Seamless application process;
Debt payments linked to an existing bill payment mechanism;
Strong, credible marketing partners;
A linkage to additional financial incentives, usually in the form of utility grants and subsidies;
Customized, multi-channeled marketing strategy by geography and market sub-sector;
Credible and competent energy efficiency program administrators and financing program
managers;
Mature and competent auditing and installation contractor infrastructure;
One-stop contracting for the full suite of audit, installation, and financing services;
An accompanying program design structure (utility or government-sponsored) that provides
incentives for comprehensive measure investments and utility savings of 15 percent or greater;
and
A capable information technology platform able to serve customers, contractors, lenders and
program administrators, and that can accurately track post-retrofit savings on utility bills.
We cannot overstate the importance of our conclusion that a well-crafted, attractive financing program
itself is necessary, but not sufficient, to effect customer uptake of energy efficiency loans on a significant
scale. We also acknowledge that the programs featuring these bundled attributes exist primarily in
states with high utility rates, robust utility incentive programs, and regulatory commissions and
governments with aggressive energy efficiency objectives. This set of associated elements are generally
limited to the Northeast, the West Coast and a few Great Lakes states. But there are exceptions, such as
Austin, Texas. We believe that the use of these attributes in formulating loan programs for the
Southeast will lead to high-performing programs.
Examples of promising new programs in the Southeast that borrow from this attributes list include the
Miami PACE effort, the South Carolina rural cooperative residential on-bill financing pilot, and the credit
union residential loan programs associated with Jacksonville, Charlottesville and New Orleans. While
none of these today meet the full set of success criteria associated with the best programs in the nation,
they have the potential to do so in the next few years.
4.1 ATTRACTIVE TERMS IN INTEREST RATES AND LOAN DURATIONS
As we know from the automobile industry, nothing beats zero interest loans for triggering new
consumer demand. California has deployed utility incentives offered by their investor owned utilities to
residential and commercial programs; and interviews of New York City lenders and financing programs in 2009 for the Natural Resources Defense Council provide most of the data for the findings enumerated here.
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write down interest rates to zero for several years, as have several municipal utilities, including
Sacramento. Some statewide programs funded with ARRA or state-provided funds have done the same.
Interestingly, even interest rates of three to six percent have been sufficient to attract substantial
participation from residential and small commercial customers, specifically when linked to other
attractive loan attributes. Terms extending seven to ten years offers a more realistic time horizon for
these loans, allowing utility savings to offset debt servicing payments, offers another strong loan
demand driver.
4.2 SEAMLESS APPLICATION PROCESS
Best practices find that an accessible application process has three important characteristics: 1) an
application length of no more than one to two pages; 2) the option of both online and fax transmittal;
and 3) lender review and approval that is achieved in three days or less. For some programs a fourth
characteristic that is highly compelling, yet costly to offer, is the in-person availability of an in-home
energy auditor or installation contractor to explain and present the loan application form to the
customer. All of these characteristics contribute to higher application rates and higher financing
program subscriptions, and have been proven effective over many years of experience by hundreds of
loan programs.
4.3 LINKAGE TO EXISTING DEBT PAYMENTS
When a customer can simply add a line item payment to an existing debt they already owe, the hassle
factor of taking on the new debt is mostly eliminated. On-bill utility financing and repayment and PACE
loans both fall into this category and represent opportunities for large increases in the volume of loans
that are applied for and approved. For both, underwriting criteria are more relaxed and customer
requirements to participate are simplified. We anticipate a very sizable increase in the participation
rates for programs offering either of these two financing mechanisms.
4.4 LINKAGE TO ADDITIONAL INCENTIVES
When building owners think about energy efficiency programs, their first thought is typically a “grant” or
“subsidy.” To date, government and utility incentive programs have provided more than $4 billion in
energy efficiency funding for building owners annually. They represent the primary drivers for stand-
alone energy efficiency investments. Stand-alone debt without accompanying incentives, however, is a
difficult sell outside of energy performance contracting. To the extent that grants and subsidies can
bring down total project costs, residential and commercial building owners are more motivated to take
on additional debt for energy efficiency projects. Many utility programs offer building owners combined
subsidies and loan programs and some have done so with on-bill financing, which represents a win-win-
win situation for both program managers and customers.
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4.5 STRONG, CREDIBLE MARKETING PARTNERS
Lenders are generally not successful marketers of energy efficiency loan products. They tend not to
allocate sufficient marketing resources to the effort; the magnitude of their energy efficiency loan
offerings are generally too small to warrant a significant internal focus when compared to their total
loan portfolios; and few of their staff completely understand energy efficiency program and eligibility
requirements.
Utilities and government agencies have not been particularly effective agents either, except when they
devote considerable financial resources to advertising their financing products. However energy
auditors and contractors who generally stand to receive financial incentives for their efforts to promote
and close energy efficiency loans are very effective marketers. Likewise, community nonprofit agencies
with environmental missions, strong credibility in their local communities, and close ties to other
neighborhood groups and contractors can be effective marketers. The Charlottesville LEAP program is
an outstanding example of such a marketing partnership between contractors and an effective
community nonprofit.
4.6 CUSTOMIZED, MULTI-CHANNELED MARKETING STRATEGIES
Messages tailored to homeowners do not resonate with apartment building owners; those aimed at
convenience stores may not be effective for restaurants. Successful energy efficiency lending programs
must always customize their messages to market sub-sectors, partner effectively with trade and
community organizations and use a variety of media to communicate their messages. Telemarketing,
email messages, online blogs, electronic newsletters, utility bill inserts, advertisements on buses, unpaid
newspaper and radio public service announcements, door-to-door canvassing and other techniques are
all effective, in various combinations and over a several month-long time period.
The most effective and appealing messages include lowering utility costs, reducing environmental
impact, improving energy security, creating jobs, reducing vacancy rates and improving the comfort of
building occupants. Each of these messages appeal differently to different market sub-sectors, and
marketing strategists can be very helpful in employing creative and effective means to reach each group.
4.7 QUALIFIED PROGRAM ADMINISTRATORS
Energy efficiency financing programs will not thrive in a vacuum. They are generally accompanied by a
utility, local or state government, or nonprofit-sponsored program that offers energy audits and
incentives for residential and commercial customers. Today, many of these programs are ineffectively
managed because they are lodged in a utility or government office where staff have other
responsibilities that take time and resources away from the management of these programs. Even some
of the nonprofit-administered programs suffer from these handicaps. However, there are also some
well-managed programs offered, and these are distinguished by a) veteran program managers, b) an
agency mission closely tied to energy efficiency program objectives, c) a strong track record of working
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with contractors and outside marketing partners, and d) an ability to manage a program with many
moving parts—not the least of which is a financing program partner.
4.8 MATURE AND COMPETENT CONTRACTOR INFRASTRUCTURE
In both large and small residential and commercial markets across the U.S., competent audit, design and
installation contractors often lack the skills and experience needed to meet the requirements of quality
energy efficiency programs, including leak sealing diagnostics, the ability to use IT measurement tools,
and even knowledge of business accounting method. This shortage of qualified energy efficiency
contractors inhibits building owners from taking on debt to invest in energy efficiency retrofits.
In many states, there are an increasing number of home performance contractors who competently
oversee HVAC and envelope measures, and who are able to pass muster in third-party post-installation
inspections. There are also growing numbers of small commercial contractors who are effective at
lighting and HVAC audits and installations. What is still needed is a cadre of contractors who can
complete high quality design and installation work and can easily pass third party quality assurance
inspection, for multiple energy efficiency measures.
Illustrative of this need, many of the 13 sub-grantees in the SEEA BBNP program struggled in their first
year to identify competent contractors to perform retrofit work, and continued to do so until quality
assurance programs had been in place for a year or more, together with extensive contractor training
programs.
4.9 ONE-STOP CONTRACTING
Simplifying audit and installation process is another key to motivating homeowners and business owners
to invest in measures beyond replacement windows and upgrades to obsolete HVAC systems. This can
best be achieved by linking loan programs with one-stop contracting programs. This would include
assigning one person associated within the energy efficiency program with responsibility for arranging
the audit, design, and installation of all cost-effective measures identified in the energy audit.
This one-stop coordination and shop process can also be linked with a quality assurance “test-out” by a
third party inspector to ensure all that the work undertaken is being performed to a high, consistent
standard. The model is the new de facto approach for the best, most effective utility programs. It is also
the basis for the energy performance contracting program model, in which a single firm possesses all of
these capabilities at once; audit, design, installation and quality assurance.
For all owner types and sizes and regardless of the financing mechanism, a one-stop contracting model
mitigates two significant barriers to getting energy efficiency retrofits financed and completed – these
are the hassle factor and the challenge of finding and coordinating the contractor talent.
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4.10 PROGRAM INCENTIVES THAT REWARD COMPREHENSIVENESS
The AFC First Pennsylvania residential loan program is a great example of a lender that lowers interest
rates and encourages larger loans for program participants who seek deeper savings through the
installation of comprehensive energy efficiency measures. AFC First offers three percent loans for
homeowners who achieve 25 percent savings from multiple measures, and nine percent loans for
standard HVAC replacements. Some utility partners, such as the New York State Energy Research and
Development Authority (NYSERDA), structure their financial incentives for residential and commercial
building owners based on these same principles.
4.11 COMPREHENSIVE INFORMATION TECHNOLOGY PLATFORMS
Access to well-designed, program-applicable software platforms for tracking and managing program
information and results is too frequently an afterthought in most energy efficiency programs. Software
that provides program administrators, lenders, contractors and customers with readily viewable, easy-
to-understand information on loan amounts, savings and other decision-making information is key. Pre-
and post-retrofit data on energy usage should be incorporated into the software platform, as do the
outputs of the energy audit. Several such software-based programs, including PSD TREAT, Energy Savvy,
and EnergyCAP, and have emerged in the marketplace over the past year or two.
There are other factors that can improve lending program uptake that exist outside the lending/energy
efficiency program structure itself. The most important of these are legislative or regulatory mandates.
Building benchmarking, labeling and energy use disclosures are the most important of these because
they link energy efficiency retrofits to tenant and owner demand, and to eventual real estate
appreciation. New York City, Washington D.C., Boston, San Francisco, Austin and other cities now
mandate these requirements for large buildings. While the political will to pass similar mandates does
not currently exist in the Southeast, this is expected to change in the next five years or so.
The authors do not expect that energy efficiency financing programs in the Southeast will quickly avail
themselves of all eleven desirable loan program attributes listed at the beginning of section 4. However,
these attributes are presented in descending order of importance, and we call the reader’s attention to
all of them, hoping that they will becoming increasingly well understood and incorporated into new
financing programs in the region, over the next several years.
5. DEFINING SEEA’S ROLE IN ENERGY EFFICIENCY FINANCE
In this section we describe potential roles for SEEA in the energy efficiency finance space, evaluate
financing alternatives, and describe key criteria for evaluation of the potential roles that SEEA might play
in the short- and long-term.
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5.1 POTENTIAL ROLES IN ENERGY EFFICIENCY FINANCE
Based on SEEA’s current mission, strengths and resources, there are a number of potential roles the
organization could undertake in order to further support energy efficiency initiatives in the Southeast:
Policy advocate;
Industry convener;
Knowledge transfer (“best practices”) provider;
Program designer for lenders;
Technical assistance / educator;
Direct implementation role – credit enhancements and other financial incentives.
By focusing its efforts on financing alternatives that capitalize on its existing strengths and roles, SEEA
can expand the impact of its programs in the Southeast.
5.2 POTENTIAL FINANCING ALTERNATIVES
There are a number of intriguing financing mechanisms, funding sources and roles that SEEA might
consider as part of it long term energy efficiency strategic plan. The following represents a list of the
most promising initiatives from across the country that were considered as part of this analysis. These
mechanisms and funding sources will later be evaluated based on SEEA’s current strengths and key
evaluation criteria.
5.2.1 PARTNERSHIP WITH BANKS OR COMMUNITY DEVELOPMENT FINANCIAL
INSTITUTIONS (CDFI)
Most large, regional national banks have established commercial real estate and equipment
loan programs designed specifically to fund energy projects. Many commercial banks have made
commitments to fund green loan programs and have also offered green grants in the
communities that they serve. CDFIs have community-based missions and often target their
lending to small businesses, nonprofit institutions and the residential single-family sector. A
partnership with a commercial bank or CDFI can leverage SEEA funds to create an energy
efficiency program tailored to a specific sector or geographic location.
5.2.2 SOUTHEAST ENERGY EFFICIENCY FINANCE NETWORK
A SEEA-branded network of lenders (commercial banks, community banks, credit unions, CDFIs)
and other finance stakeholders (contractors, utilities, community groups and trade associations)
created to encourage lending for energy efficiency projects in the Southeast. The network would
include the sharing of best practices and key program elements, technical assistance, new
product development and credit enhancements.
5.2.3 PARTNERSHIP AND PROMOTION OF GOVERNMENT FINANCE PROGRAMS
Federal government agencies offer many finance programs for energy efficiency and related
initiatives. As a regional energy efficiency leader in the Southeast, SEEA could market and
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promote these existing programs including HUD’s PowerSaver program, the U.S. Department of
Agriculture Rural Development Office’s Energy Efficiency and Conservation Loan Program, or
even some of the Housing Finance Agency programs.
5.2.4 ON-BILL REPAYMENT (PARTNERSHIP WITH UTILITIES)
As described earlier, an on-bill repayment program enables building owners to repay loans for
eligible energy efficiency and renewable electricity generation projects through their monthly
utility bills. SEEA could use its strengths in policy and technical advisory to help build and
promote successful on-bill repayment programs throughout the Southeast.
5.2.5 PROPERTY ASSESSED CLEAN ENERGY (PACE)
When authorized by state law this potentially transformative financing tool, described in section
3.1.5 of this report, allows local governments, state governments, or other inter-jurisdictional
authorities to fund 100 percent of the upfront costs for energy efficiency improvements.
Property owners voluntarily choose to participate in a PACE program and repay the cost of
improvements through property assessments, which are secured by the property itself and paid
as an addition to the owners’ property tax bill. With SEEA’s strengths in both the policy and
technical assistance arenas, PACE programs in the Southeast have the opportunity to make a
real impact.
5.2.6 VALUATION OF ENERGY EFFICIENCY IMPROVEMENTS IN BUILDING
ASSESSMENTS
The Federal Housing Administration’s (FHA) Energy Efficient Mortgage program (EEM) enables
homeowners and homebuyers to finance the cost of adding energy efficiency features to new or
existing housing as part of their FHA-insured home purchase or refinanced mortgage. EEM can
be used to make energy efficient improvements in existing and new one- to four-family homes.
Energy efficiency improvements can be included in a borrower's mortgage only if their total cost
is less than the total dollar value of the energy that will be saved during their useful life.9 The
recent announcement by Freddie Mac and the Environmental Protection Agency to collaborate
on gathering energy data and share it with realtors brings the multifamily sector more sharply
into focus for this effort. SEEA’s existing building codes work may help to advance this effort.
5.2.7 GREEN BANKS
A green bank is a public/private partnership that leverages state funds, federal grants,
foundation grants, private investment, bonds and, in some cases, rate-payer funds to provide a
low-interest rate funding – and possibly up to 100 percent financing – for energy efficiency
projects. A green bank could also work closely with private banks to provide loan guarantees,
9 U.S. Department of Housing and Urban Development website, Energy Efficient Mortgage Program, http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/eem/energy-r
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credit enhancement, and other financing tools to stimulate private-sector lending and
investment in projects that cannot access commercial financing on economically feasible rates
and terms. Although this type of financing mechanism is typically formed at the state level, such
as New York State’s Green Bank, SEEA could play a role in helping to develop these types of
programs for the Southeast.
5.2.8 ADMINISTRATIVE “HUB” FOR ENERGY EFFICIENCY FINANCING.
In September 2013, the California Public Utilities Commission released their plan for energy
efficiency finance pilot programs in 2013 and 2014. One of the programs, identified as the
California Hub for Energy Efficiency Financing (CHEEF), will help increase the flow of private
capital to energy efficiency projects. To accomplish this, the CHEEF will manage the flow of
funds and data, and provide a simple, streamlined structure through which energy users,
financial institutions, energy efficiency providers and utilities can participate in a standardized
“open market” that facilitates energy efficiency financing in California.10 The Administrative Hub
is a worthwhile structure that SEEA might consider for long-term use, possibly as the next phase
of the Southeast Energy Efficiency Finance Network.
5.2.9 SEEA-BRANDED REVOLVING LOAN FUND
A revolving loan fund can be used to leverage investment from one or more sources to lend
money for energy efficiency retrofit projects. The energy savings, or portion of the savings,
calculated as the avoided energy costs resulting from each project, are tracked and returned or
“revolved” back into the revolving loan fund and can be used to finance new projects. As
reductions in energy costs are realized, the revolving loan fund is repaid from the avoided
energy costs. SEEA might use all or some of its remaining DOE funds to establish a revolving loan
fund for programs in the Southeast.
5.2.10 QUALIFIED ENERGY CONSERVATION BONDS (QECB)
In 2009, Congress authorized the allocation of $3.2 billion of subsidizing bonding authority to
states and large local governments to finance qualified energy projects through the issuance of
tax credit bonds. Issuers of the bonds can choose to issue taxable bonds with a corresponding
tax credit for the lender, or receive a direct cash subsidy from the U.S. Treasury.
Qualified energy conservation bonds can only be issued for qualified conservation purposes,
which can include not-for-profit institutions. Qualifying projects include capital expenditures
that reduce building energy consumption by at least 20 percent; the implementation of green
community programs like upgraded street lighting; support for energy-related research facilities;
10 California Public Utilities Commission, Proposed Decision for 2013-2014 Energy Efficiency Finance Pilot Programs, http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M076/K939/76939319.pdf
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and the launch of public education campaigns that promote energy efficiency.11 To date, many
of the QECB funds available in the Southeast have not be used, and SEEA might consider training
and education to help states and local governments to take advantage of these low-cost, readily
available funds.
These ten financing mechanisms and funding sources are further evaluated in the next section
using evaluation criteria specific to SEEA’s mission and its goal to advance energy efficiency
financing programs.
5.3 KEY EVALUATION CRITERIA
The following criteria were used to evaluate the list of ten potential financing alternatives outlined
above:
Confluence with existing SEEA activities – An analysis of how well the mechanism aligns with
SEEA’s stated mission and the current roles SEEA plays within the energy efficiency space today.
For example, on-bill policy development would seem to align with SEEA’s current work
convening utility stakeholders, as well as with its policy work with utility regulators.
Identifiable sources of funding – An evaluation of the long-term sustainability of each financing
mechanism including consideration of any government agencies, foundations or third party
investors who have expressed an interest in supporting this type of work. In addition, this
criterion is used to evaluate potential revenue streams – including membership fees – that will
help to sustain the work over the long term.
SEEA staff capacity and financial resources – An assessment of SEEA’s internal resources that
are immediately available to execute the financing plan. SEEA has approximately $700,000
available to pilot and test-out new financing programs. Successful programs developed in the
short-term will be considered for longer-term replication.
Evidence of accompanying attributes driving demand – This criterion captures the loan
attributes critical to program success that were outlined in Section 4. While we do not anticipate
that all of these attributes will be evident, recommended financing alternatives should address
as many as possible.
Market Assessment – A review of the energy efficiency marketplace, especially in the
Southeast. This review, which is summarized in Table 2 below, includes the potential impact of
the financing mechanism, its relative maturity in the marketplace, the level of effort SEEA will
need to make to launch the program, and whether the program fills a noticeable gap in the
marketplace.
11 Energy Efficiency and Renewable Energy (EERE) website, http://www1.eere.energy.gov/wip/solutioncenter/financialproducts/qecb.html,
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MARKET ASSESSMENT OF FINANCING MECHANISM AND FUNDING SOURCES
TYPE OF FINANCE ROLE MARKET
IMPACT MATURITY IN
MARKETPLACE SEEA LEVEL
OF EFFORT
Partnership with Commercial Bank or Large CDFI Medium Emerging Medium
Southeast Energy Efficiency Finance Network Large Concept Large
Partnership and Promotion of Government
Finance Programs Medium Mature Medium
On-Bill Repayment (Utility Partnership) Large Emerging Medium
Property Assessed Clean Energy (PACE) Medium Emerging Small
Valuation of energy efficiency improvements in
building assessments Large Concept Small
Green Bank Small Emerging Large
Administrative “Hub” for EE Financing Medium Concept Large
Revolving Loan Fund Small Mature Large
Qualified Energy Conservation Bonds Small Mature Medium
As a result of this criteria-based analysis, a number of financing alternatives were eliminated from
further discussion, either because the mechanism or funding source would have a relatively small
impact on the region or because the effort that would be required of SEEA to launch it would have been
too large.
These mechanisms were eliminated from further consideration: 1) partnering with a large commercial
bank or CDFI, 2) Green Bank, 3) Administrative Hub, 4) Revolving Loan Fund, and 5) Qualified Energy
Conservation Bonds. While these mechanisms are not being considered for SEEA involvement at this
time, they will continue to be monitored and evaluated for inclusion in SEEA’s long term strategy.
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6. SEEA’S ROLE IN FINANCING ENERGY EFFICIENCY
Based on the evaluation above, the following five recommended activities emerge as the most impactful
roles that SEEA can play in the short- and long-term. Many of the recommended activities can be
accomplished in the short term and are not mutually exclusive.
6.1 SOUTHEAST ENERGY EFFICIENCY FINANCE NETWORK
The most effective and impactful role for SEEA to play in the energy efficiency finance space is that of a
convener and educator for the multiple energy efficiency participants in the Southeast. The Southeast
Energy Efficiency Finance Network is a collaborative network of partners including lenders (commercial
banks, community banks, credit unions, CDFIs) and other finance stakeholders including contractors,
non-profit community organizations, utilities and local, state and federal government agencies. This
member-based network will collaborate to encourage lending for energy efficiency projects in the
Southeast.
SEEA’s Role:
Convene lenders and other participating partners
Coordinate network and the sharing of best practices
Advocate for policy changes and advancements
Provide technical assistance and educational opportunities for all members
Offer financial assistance to lenders through credit enhancements
Partners:
Regional banks
Financial institutions: banks, credit unions, CDFIs, etc.
Local, state and federal agencies
Utilities
Contractors
Non-profit community
Trade associations.
By serving as an umbrella for SEEA’s financing activity, the Southeast Energy Efficiency Finance Network
would oversee all financing activity, including SEEA’s other major areas of focus – Partnership with
Government Programs, On-Bill Repayment, PACE and enhancements to the valuation of energy
efficiency in real estate transactions – and build off of SEEA’s current strengths as a convener, policy
advisor, educator and technical assistance provider as depicted in Figure 3 below.
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THE SOUTHEAST ENERGY EFFICIENCY FINANCE NETWORK
6.2 PARTNERSHIP AND PROMOTION OF GOVERNMENT PROGRAMS
As part of the Southeast Energy Efficiency Finance Network, SEEA will market and promote existing
government financing programs including HUD PowerSaver, USDA Rural Development Energy Efficiency
and Conservation loan programs, and other Housing Authority and State Agency programs. SEEA will
develop a comprehensive list of government loan programs and will make it available to all members of
the Southeast Energy Efficiency Finance Network. As new programs are developed, SEEA will ensure
these programs are well-marketed within the region.
SEEA’s Role:
Convene groups of interested government partners
Maintain a comprehensive list of available programs
Provide education and awareness of programs to the Southeast Energy Efficiency Finance
Network
Provide credit enhancements to leverage existing funding
Partners:
Department of Energy
Department of Housing and Urban Development
U.S. Department of Agriculture
State agencies
Financial institutions: banks, credit unions, CDFIs, etc.
6.3 ON-BILL REPAYMENT (OBR)
Leverage partnerships with utilities to offer on-bill repayment to residential and commercial customer
throughout the Southeast. SEEA could also develop “OBR in a Box,” a set of standardized procedures
and documents based on the best practices of successful utility programs. In addition, SEEA could offer
technical assistance and educational opportunities for local municipal utilities and cooperatives.
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SEEA’s Role:
Convene group of utilities and local financing entities
Develop a list of best practices and standardized procedures/documents
Provide education and awareness to members of the Southeast Energy Efficiency Finance
Network
Provide credit enhancements to leverage existing funding
Partners:
Utilities
CDFIs and local credit unions
Government organizations (USDA, HUD, DOE)
6.4 PROPERTY ASSESSED CLEAN ENERGY (PACE)
Encourage the use of PACE programs throughout the Southeast especially in states with existing PACE
enabling legislation. SEEA would leverage its work with PACE organizations in Florida, Atlanta and other
locations to share best practices and promote PACE policy changes in states without PACE legislation.
SEEA’s Role:
Act as policy advisor for PACE legislation
Develop a list of best practices and standardized procedures/documents
Provide education and technical assistance to members of the Finance Network
Partners:
State and local governments
Private investors
6.5 VALUATION OF ENERGY EFFICIENCY IMPROVEMENTS IN BUILDING
ASSESSMENTS
Through active engagement of realtors, appraisers and lenders, SEEA could facilitate the development of
local task forces to encourage voluntary benchmarking and disclosure of energy efficiency
improvements in MLS listings. The recent joint announcement of Freddie Mac and EPA in the
multifamily sector also deserves SEEA support. This work could build off of SEEA’s current building code
policy work and expand SEEA’s network of real estate professionals.
SEEA’s Role:
Leverage building code policy work
Develop a list of best practices and standardized procedures/documents
Work with industry groups to develop, pilot and disseminate information
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Partners:
Energy auditors and building rating firms
Realtors, appraisers and lenders
The Appraisal Institute
the Investor Confidence Project
Institute for Market Transformation (IMT)
6.6 POTENTIAL SOURCES OF REVENUE
To ensure the long-term sustainability of the organization, SEEA must consider the potential sources of
funding associated with each of the short- and long-term financing options outlined above. In the short-
term, foundation and federal government grants – particularly those associated with SEEA’s mission and
targeted areas of opportunity – SEEA will help to establish the Southeast Energy Efficiency Finance
Network as well as facilitate the list of best practices for PACE, OBR and energy efficiency valuations. In
the long-term, potential sources of income could include membership fees from participants in the
Southeast Energy Efficiency Finance Network, and revenue from fees associated with technical
assistance from OBR, PACE and lending program design.
7. CONCLUSION AND NEXT STEPS
As a proven energy efficiency leader, SEEA is poised to launch an impactful and innovative set of policy
and programmatic improvements for energy efficiency in the Southeast. Through the development of
the Southeast Energy Efficiency Finance Network and advancements in PACE, On-Bill Repayment and
property assessments, SEEA can help the region advance energy efficiency. To further define SEEA’s role
in the energy efficiency financing space, and to leverage the remaining DOE grant funds, next steps are
as follows:
7.1 ISSUE REQUEST FOR PROPOSALS (RFP) FOR REMAINING FUNDS
To support the development of innovative financing options for energy efficiency in the Southeast, SEEA
has released an RFP to interested non-profit organizations, financial institutions and private investors.
This RFP offers organizations a unique partnership opportunity to take advantage of DOE-funded credit
enhancements and participate in its regional energy efficiency lending partnership program. The goals of
this program are to improve building performance and comfort, promote economic development,
create local jobs, and save residents and property owners money and energy.
7.2 ESTABLISH FRAMEWORK FOR SOUTHEAST ENERGY EFFICIENCY FINANCE
NETWORK
Develop a strategy and timeline for the inauguration of the Southeast Energy Efficiency Finance
Network. This framework will include:
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Invite to all potential participants;
Identify and share of best practices for successful programs;
Convene participants to discuss the technical assistance and education needed to move energy
efficiency forward in the Southeast;
Deliver marketing support for all Southeast financing programs that are performing well, and
develop their credibility through awards, press releases, and other marketing strategies;
Facilitate emerging programs with strong potential, such as USDA, co-ops and OBR or PACE;
Prioritize policy and education work based on quarterly convening of network participants.
7.3 DEVELOP EDUCATIONAL MATERIALS AND TECHNICAL SUPPORT FOR
AREAS OF FOCUS
Discuss state priorities and attract SEEA Members by utilizing the five areas of focus outlined above to
convene state-by-state meetings with stakeholders, including lenders, governments, utilities,
contractors, regulators and consultants.
Identify and write about the best practices of the most successful energy efficiency financing
programs nationwide, emphasizing common elements of program design, marketing strategy,
program administration credibility, information technology platform, contractor roles and
capabilities, measurement and verification, interest rates and terms, and other incentives.
Based on results of state convenings, prioritize the policies worth pursuing in each state,
informed by political opportunity and potential impact. Develop an advocacy strategy for those
policies.
Pay special attention to emerging programs with high potential, such as USDA/OBR for co-ops,
PACE, HFA mortgage add-ons, and provide technical assistance as needed.
7.4 POTENTIAL IMPLEMENTATION TIMELINE
All of the steps outlined above can and should be done simultaneously for the greatest impact in the
region. The timeline outlined in Figure 4 outlines one way the programs can be launched in
coordination with one another.
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SEEA'S SHORT-TERM IMPLEMENTATION TIMELINE
The offering of high quality, accessible financing to building owners of all sizes in all parts of the
Southeast is critical to the regional growth of energy efficiency and renewable energy. As this report
details, the design and delivery of a financing service that engages both lenders and building owners on
any significant scale is challenging. Even the best-crafted financing programs are unlikely to gain major
market acceptance in the near term, in the Southeast, because too many barriers exist to their adoption.
To overcome these, an elaborately coordinated marketing, contractor, and administrator effort is
needed to drive owner demand.
SEEA’s recent experience administering the Better Buildings Neighborhood program, its unique role in
the region, its mission and its staff resources position it to take on this challenge. This report lays out a
set of tasks and milestones to address this opportunity.
Success will likely not be immediate, but over the next two to four years, we believe SEEA can make
major contributions to lenders, energy efficiency program administrators, utilities, contractors, building
owners and other key stakeholders in this field. SEEA will continually seek feedback and advice from its
board, advisors, funders, researchers and other stakeholders and revise our efforts accordingly.
Together, let’s make an impact.
Jan 2014April 2014
July 2014 Oct 20142015 and Beyond
Develop Network
Guidelines Send out RFP
Select program to be funded
Implement programs
Convene first meetings
Develop comprehensive list of available federal loan programs
Establish partnerships and marketing plan
Launch programs
Compile list of on-bill repayment best practices
Develop “On-bill repayment in a Box”
Launch programs
Compile list of PACE best practices Policy advocacy and work with pilot areas to launch
programs
Convene staff and EE real estate appreciation task forces and facilitate voluntary benchmarking and disclosure in market subsectors