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Financing Residential Efficiency and Renewable Energy Building Retrofits

1. Today's discussion. 7 Elements of Financing definition of vocabulary and frameworkLimitations of existing standard financing programsSome examples of burgeoning, successful finance programs, but with limited historyLessons learned and generic recommendations from VEIC??? Discussion of questions YOU would like answered in RFQ to be issued by ECMB.

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Financing Residential Efficiency and Renewable Energy Building Retrofits

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    2. 1 Today’s discussion 7 Elements of Financing – definition of vocabulary and framework Limitations of existing standard financing programs Some examples of burgeoning, successful finance programs, but with limited history Lessons learned and generic recommendations from VEIC ??? Discussion of questions YOU would like answered in RFQ to be issued by ECMB

    3. 2 Survey of 150+ Energy Financing Programs AFC’s Keystone Home Energy Loan City of Cambridge (new) Efficiency Vermont California EE Loan Fund (terminated) MN Center for Energy and Environment NYSERDA's Energy $mart Loan Fund NYSERDA's HPwES Loan Program Nebraska Energy Office Sacramento Municipal Utility District Vermont Gas Systems Viewtech Financial Services BC Hydro (terminated) First Electric Cooperative Manitoba Hydro NW Natural Gas (terminated) Conventional 19 cases studies – of the 150+ in the US Talk about conventional, OBF, TIP, and CEMF here Too small19 cases studies – of the 150+ in the US Talk about conventional, OBF, TIP, and CEMF here Too small

    4. 3 150+ Energy Efficiency Financing Programs in the US…

    5. 4 7 Elements of Financing Sources of Capital Financing Mechanisms Collection Mechanisms Enhancements Eligible Measures Underwriting Criteria Security Interests

    6. 5 1. Sources of Capital for Upgrade Investments Customer Banks PBC or added to rate base Utility general funds (not common; debt liability on balance sheet) Utility-controlled RGGI funds ? State/municipal general funds Municipal bonds Pension funds Housing or economic development finance agency Grants: ARRA – limitation on 30% of $ into Revolving Loan fund; (Block Grants can be used by a municipality) Foundations

    7. 6 2.a. Residential Financing Mechanisms Consumer loan (secured or unsecured); from banks and credit unions: 6-12% Mortgage 5-6% for 15-30 yrs / home equity loan: 7-9% up to 15 yrs Energy Improvement Mortgages (EIM); underutilized currently Deep energy savings re-finance Mortgage refinance Tariffed installment program (TIP) Midwest Energy defines as “line extension charge beyond the meter;” not traditional “loan”: 4% for 15 yrs Residential Can also be a new tariff (under consideration in NY State) Attractive for rental market to overcome split incentives Special municipal tax or fee-levied: 7-8% for 20 yrs

    8. 7 2.b. Commercial Financing Vehicles for large multi-family buildings Split incentive is huge issue. Term of financing mechanism determines outcome: -short financing terms: landlord will need to raise rents -long financing terms (20 yrs with tax district; 30 yrs with mortgage): rent increases will be offset by energy savings TIP?: only multi-family experience is with 2 very small properties Property Assessed Clean Energy (PACE) – new terminology for Clean Energy Assessment Districts Mortgage refinance to include EE improvements Commercial loan or equipment lease

    9. 8 3. Residential Collection Mechanisms Monthly amortized loan payment (direct debit encouraged) On-utility bill Short term standard loans (typically <5 years) Longer term standard loans bought down to ensure net lower bill to consumer TIP, with utility-provided funds or additional tariff On-property tax bill

    10. 9 4. Enhancements Reduced interest rates Stretched underwriting criteria (to allow lower FICO scores) Guarantees and reserves set-asides for lenders to cover defaults, thereby widening eligible borrowers without increasing interest rate Rebates to buy down initial loan Subsidized transaction costs

    11. 10 5. Eligible Measures Energy Efficiency – often only specific measures allowed Some pre-requisites imposed: attic insulation of R-38 before HVAC replacement Renewables (generally EE as pre-requisite) Other home improvements needs special approval, as will likely violate goal of positive cash flow

    12. 11 6. Underwriting Criteria Debt to income ratio (standard) FICO score (standard) Utility bill payment history (when collection mechanism is on utility bill) Tax payment history (when collection mechanism is on property tax bill)

    13. 12 7. Security Interests Unsecured (shorter term, lower $ amounts) Disconnection for nonpayment – significantly reduces perceived credit risk UCC fixture lien (recorded on property title, notifying new buyer) Mechanics lien (security interest in property title); not common

    14. 13 Problem definition Traditional loan programs fail to meet EE-specific needs of positive cash flow Fails lower-moderate income households Burgeoning programs have deeper and broader potential, but have only short histories Tariffed Installment Program (TIP) Property Assessed Clean Energy (PACE)

    15. 14 Tariffed Installation Program (TIP)

    16. 15 Tariffed Installation Program (TIP)

    17. 16 TIP Example: Midwest Energy, Kansas Central premise: lower utility bills; finance 90% of projected energy savings Participation & Results (2008 pilot in 4 regions; 2009 district-wide): Cumulative $$ for EE improvements from utility: $1 million Number of forecast 2009 participants: 170 projects, including 24 rental properties (mostly single-family homes) Typical project costs $6,300 total ($900 insulation; $5,400 HVAC) Utility-supported: $4,900 average Participant-paid: $1,400 (22%) average Estimated combined electric and gas savings: 20 - 25% Typical bill savings: $50 out of $250 combined electric and gas

    18. 17 TIP Example: Midwest Energy, Kansas, continued Terms: 4% for 15 years for cost-effective EE non-appliance, non-CFL measures new measure, as of July 1st: 30 years for geo-thermal Funding sources: 50% from State’s Revolving Load Fund (will come from ARRA in 2010) and 50% from 8% Regulatory Rate of Return Regulatory commission approval: 6-month process UCC lien placed by utility on property; notifies new buyer at time of sale Virtually no experience with multi-family buildings Self-reported key to success: Contractor relationships and mediating contractor-homeowner disputes

    19. 18 Property Assessed Clean Energy (PACE)

    20. 19 Property Assessed Clean Energy (PACE)

    21. 20 PACE Example: Berkeley, CA Law: Mello-Roos (special tax district) $$: Issued “baby muni-bonds” purchased by a financial partner who can package and resell Terms: 7.75% for 20 years (varies based on 10-year Treasury plus 3.25%) Status: $1.5 claimed in 9 minutes for the solar-only pilot round; basic energy improvements required prior to solar

    22. 21 PACE Example: Palm Desert, CA Law: AB 811 (assessment district) $$: Used general revenue funds to start, then Redevelopment Authority bonds, now looking for additional funds Terms: 7% up to 20 years Status: $7.5 million claimed since Nov 2008 launch. 206 applications, primarily residential projects. >50% include EE (A/C upgrades, pool pumps, insulation) 70% of funds to solar

    23. 22 Property Accessed Clean Energy - on the Move!

    24. 23 Financing - Lessons Learned With 150+ efficiency financing programs, participation has been minimal (<0.5%) Traditional financing programs have mostly served higher income credit enhancement is critical to capture low-moderate income Short-term consumer financing (less than 7 yrs) cannot achieve deep savings (goal of 25%) … … unless there are substantial subsidies Positive cash flow is key reduces risk perceived by lenders supports loans to those who otherwise would be denied credit

    25. 24 Finance Program Design – 5 Generic Recommendations To achieve wide participation and deep savings : 1. Focus on long repayment terms (10 - 30 years)

    26. 25 Financing – 5 Recommendations To achieve wide participation and deep savings: 1. Focus on long repayment terms (10-30 years) 2. Secure repayment through dedicated, structural revenue streams (utility bills, tax assessments, mortgages), rather than personal credit

    27. 26 Financing – 5 Recommendations To achieve wide participation and deep savings: 1. Focus on long repayment terms (10-30 years) 2. Secure repayment through dedicated, structural revenue streams (utility bills, tax assessments, mortgages), rather than personal credit 3. Broaden the pool of potential participants through loan guarantees and other credit enhancements to ensure capturing low-moderate income

    28. 27 Financing – 5 Recommendations To achieve wide participation and deep savings: 1. Focus on long repayment terms (10-30 years) 2. Secure repayment through dedicated, structural revenue streams (utility bills, tax assessments, mortgages), rather than personal credit 3. Broaden the pool of potential participants through loan guarantees and other credit enhancements 4. Expand and strengthen network of energy improvement and HVAC contractors as sales force for financing

    29. 28 Financing - Recommendations To achieve wide participation and deep savings: 1. Focus on long repayment terms (10-30 years) 2. Secure repayment through dedicated, structural revenue streams (utility bills, tax assessments, mortgages), rather than personal credit 3. Broaden the pool of potential participants through loan guarantees and other credit enhancements 4. Expand and strengthen network of energy improvement and HVAC contractors as sales force for financing 5. Pursue parallel paths, given long development times for lenders, contractors, and legal and regulatory approval process

    30. 29 Questions to be asked in RFQ – Your input requested! Most attractive financial vehicle(s) recommendations for Connecticut? ?? Do we agree on a 3-pronged, parallel path: On-utility bill (DPUC mandated) Mortgages: 15-yr (not 5-yr) home equity loans refinance to cover energy efficiency $ EIM at time of sale PACE to be pursued by non-utility entities (Clean Water Action and others?)

    31. 30 Questions to be asked in RFQ – Your input requested! Most attractive financial vehicle(s) recommendations for Connecticut? ?? Parallel path? Other questions that the consultant should be prepared to address?? 7 Elements of Financing, including: . Sources of capital . Financing mechanism . Funding requirements for credit enhancement & loan guarantees How much capital should be available to be loaned out?? What are the available sources of funding in CT?? ??

    32. 31 Questions to be asked in RFQ – Your input requested, continued! II. Legal and regulatory barriers and necessary procedures Most states want enabling legislation, but some municipalities have undertaken this independently; depends on state philosophy ?? Best path for CT? III. ?? Political barriers and vehicles?

    33. 32 Appendix I Specialized PACE example: Babylon, NY Law: Redefined “municipal solid waste” (an existing assessment) $$: Used existing municipal solid waste fund as revolving loan pool Terms: 3%; term varies based on expected savings Status: 84 homes have claimed over $500K in first 5 months for air sealing, insulation, and replacing space heating and hot water systems Savings: estimated average of 28% per home

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