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.

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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