Energy Finance 101: Mechanisms for Financing Sustainable Energy

1. Energy Finance 101: Mechanisms for Financing Sustainable Energy Chris Lohmann U.S. Department of Energy

2. Financing is an ideal way to increase deployment of energy efficiency and renewable technologies • Financing programs are inherently sustainable whereas grants and rebates are once-and-done • Loan repayments can be “revolved” • Leveraging private capital allows ARRA money to make significant impact • e.g, Loan loss reserves enable leverage ratios as high as 20:1 • $50,000 in ARRA Money  $100,000 in private sector capital • Financing programs provide the capital borrowers need to pursue comprehensive retrofits • Few consumers have $7,500 in funds available for a retrofit • Banks have tightened loan standards for consumers and businesses • Must obtain capital from alternate sources (e.g., ARRA programs) • Effective loan programs provide borrowers with positive cash flow (Energy Savings > Monthly Loan Payment) The ongoing capital availability combined with a clear customer value proposition transforms the retrofit market by providing long-term business and workforce development opportunities

3. Revolving Loan Funds (RLF)

4. Loan Loss Reserve (LLR)

5. Property-Assessed Clean Energy (PACE)

6. On-Bill Financing

7. The Financial Market Development Team is providing robust technical assistance resources to support grantees with financing initiatives • DOE has assembled a team of finance experts with key skills in: • Designing innovative financing programs • Matching appropriately structured financial products with deep capital markets • This group of experts is available to help develop finance programs for SEP and EECBG grantees

8. Technical Assistance Comes in Several Forms • Education and Self-Help: Webinars, White Papers, & Online Resources • Responsive Assistance: Requests through the Technical Assistance Center will be directed to the appropriate resources. Assistance will be tailored to help meet the specific needs of each request -- to include one-on-one sessions and site visits where appropriate. • Pro-Active Outreach: DOE will seek to identify and reach out to grantees who are strong candidates for finance programs but who are currently unaware of their potential benefits. This may include aggregating multiple small grantees into consortiums to achieve sufficient scale to make financing programs cost-effective.

9. PACE Financing Programs: Enabling Investments in Clean Energy Merrian Fuller Lawrence Berkeley National Laboratory (LBNL) April 7, 2010

10. Barriers to Energy Efficiency • “Not worth the effort” (i.e. transaction costs) • Lack of information • Uncertainty about the energy savings • Split incentives • High upfront costs • Others…

11. 150+ Residential Energy Efficiency Financing Programs in the US… Success!! Our work is done. Most programs reach less than 0.5% of their potential participants each year

12. Issues with Existing Financing Options • Low Participation Rates • Limited Applicability to Households Most in Need • Limited Support for Comprehensive Retrofits • Inability of Programs to Cover Their Costs Report available: http://uc-ciee.org/energyeff/documents/resfinancing.pdf

13. Property-Assessed Clean Energy (PACE) $$ Upfront $$ Repaid on tax bill • Identifies work & chooses contractor • Repays financing as a line item on the property tax bill • Repayment obligation transfers with ownership • Creates financing district & approval process • Provides upfront capital • Attaches repayment obligation to the building

14. Potential Benefits of PACE • New source of capital for EE/RE improvements • Longer repayment period – Up to 20 years, compared to 5 to 7 years • Repayment transfers with ownership – Property owners do not want to invest in improvements if they plan to sell their property in a few years. • Tax benefits –The interest portion of repayments are tax deductible. • Reduced transaction costs – Often an easier process than applying for a home equity line or second mortgage. • Information from a trusted source – State and local govts are a trusted source of info and can enable residents and businesses to take action. • Low interest rates – Low rates MAY be available due to the lower interest on municipal bonds and other sources of financing.

15. Property Assessed Clean Energy (PACE) www.dsireusa.org / November 2009 MN: 2010 NY: 2009 OR: 2009 VT: 2009 WI: 2009 MD: 2009 NV: 2009 OH: 2009 IL: 2009 CO: 2008 CA: 2008 VA: 2009 NC: 2009 NM: 2009 OK: 2009 19! TX: 2009 18 states authorize PACE (16 states have passed legislation and two states permit it based on existing law) LA: 2009 FL: Existing Authority* HI: Existing Authority* PACE financing authorized

16. Additional Legislation Many states “in the process” of pursuing legislation: Alaska, Arizona, Connecticut, Delaware, Florida, Hawaii, Iowa, Idaho, Kansas, Maine, Massachusetts, Maine, Michigan, Missouri, Nebraska, New Hampshire, Ohio, and Pennsylvania Efforts to amend existing legislation in: Colorado, Illinois, Maryland, Virginia and New York

17. Existing PACE Programs These 5 programs have approved almost $50 million in funding for >2,000 EE/RE projects to date. New: River Falls and Racine, WI; San Francisco, CA Coming Soon: California FIRST (statewide JPA with 14 counties launching summer 2010), Humboldt County, Los Angeles, CA; Montgomery County and Annapolis, MD; Vermont (multiple towns) PACE How To Guide: http://rael.berkeley.edu/financing

18. Who Runs the Program? • Berkeley and San Francisco – Both administrative and funding functions run by a third party (Renewable Funding) • Boulder County – Many functions run by county staff; processing applications and some parts of the funding run by third parties • Town of Babylon, Palm Desert and Sonoma County – Most program functions run in-house.

19. Underwriting Criteria? • Existing programs to date – Clear title, no involuntary liens, good property tax payment history for 2-3 years; often max assessment to property value ratio (~10%) • San Francisco & other emerging programs – Will look at property value and outstanding mortgage to make sure the property is not currently under water

20. Source of Funds? • Berkeley and San Francisco – “Mini-bonds” purchased immediately by a pre-determined investor (~7.5% interest) • Boulder County – Aggregates demand THEN issues a bond (5.2% - 6.8%) • Town of Babylon – Existing solid waste fund repurposed for EE/RE loans (3%) • Palm Desert & Sonoma County – Bonds are currently held by the local govt (7%)

21. Eligible Measures? • Berkeley – Pilot was solar-only • Boulder County – Long list of measures including efficiency, solar, other renewables. • Town of Babylon – Energy efficiency primarily with high bar to get solar. • Sonoma – Range of efficiency, renewable energy, and water conservation measures • San Francisco – Energy and water efficiency, plus renewables if EE is also done.

22. Sonoma County, CA

23. Town of Babylon, NY Misc 2% Windows 2% Wall insulation 8%

24. Quality Control? • Berkeley – State reviews the solar projects and provides a rebate reservation letter. Berkeley's administrator checks the documentation. • Palm Desert – Program staff reviews the project scope to check for eligibility and reasonable cost. Site inspection of projects to ensure quality and compliance. • Boulder County – Program staff reviews the project scope to check for eligibility. Spot checks of some projects to ensure quality, though many projects already require a building permit and inspection. • Town of Babylon – Program staff reviews the project scope to check for eligibility compliance and reasonable cost. Performance testing is required. Must be a Building Performance Institute (BPI) accredited contractor.

25. Potential Issues • Limits on What Can Be Funded – Must be fixed to property and last at least as long at the financing term; potential limitations if required to be “cash flow positive”. • Cost of Setup – Often administratively difficult to set up, especially for limited local government staff; however it is easier/cheaper as trail blazers develop templates. • Scale – A city, town, or small county is probably too small to bring down costs; fix costs need to be spread over hundreds or thousands of assessments each year. • Access to Cheap $ – Need volume and standardization to bring down cost of capital; “on demand” funding important but more expensive.

26. DOE Resources To request specific Technical Assistance go to the TAC website at https://tac.eecleanenergy.org/Default.aspx DOE Resource website on financing, including PACE programs: http://www.eecbg.energy.gov/solutioncenter/financialproducts/ How to Guide for PACE Programs http://rael.berkeley.edu/files/berkeleysolar/HowTo.pdf Webinars, including 3 on aspects of PACE programs: http://www.eecbg.energy.gov/solutioncenter/webcasts/ Federal Government’s Policy Framework for PACE Financing Programs http://www.whitehouse.gov/assets/documents/PACE_Principles.pdf State legal authority for PACE programs is tracked by the DSIRE database http://www.dsireusa.org/incentives/index.cfm?EE=1&RE=1&SPV=0&ST=0&searchtype=PTFAuth&sh=1

27. Contact Info Merrian Fuller Lawrence Berkeley National Laboratory Email: MCFuller@lbl.gov Phone: 510-486-4482

28. LBNL Areas of Research • Technical assistance to ARRA$ recipients, especially around financing and retrofit program design • Driving demand for residential retrofits with new messages and messengers (social marketing / community-based outreach) • Interactions between ARRA$ and ratepayer programs • Energy efficiency services sector (EESS) workforce size, expected growth, and training/education needs

29. Revolving Loan Fund - Operating Model Step 4 RLF relends $95K Step 2 RLF loans $100K to borrowers Step 1 State capitalizes $100K RLF using SEP funds State Revolving Loan Fund Borrower Step 3b Borrowers default on $5K Step 3a Borrowers repay $95K State SEP Funds Default Slide 29

30. Loan Loss Reserve - Operating Model Step 6 Lender relends $100K Step 2 Lender loans $100K to borrowers Private Lender (using their own capital) Borrower Step 3a Borrowers repay $95K Step 4 Loan Loss Reserve reimburses lenders for $5K defaults Step 3b Borrowers default on $5K Loan Loss Reserve State SEP Funds Step 1: State uses SEP funds to create $10K Loan Loss Reserve Default Contractors / Banks Step 5: Participating contractors and banks recapitalize fund through fees

31. PACE Property Assessed Clean Energy- Operating Model Contractor Step 1 Local government establishes clean energy assessment district Step 4 Loan goes to property owner Step 5 Installation and payment Step 2 Property owners voluntarily opt in to program Local Government Property Owner Step 6 Owner receives and pays tax assessment for 10-20 years Step 3.a DSR fund set up to attract lenders for leverage Step 3.b Government arranges financing terms with Energy Lender Debt Service Reserve Fund Energy Lender Slide 31