Tapping private capital for clean energy upgrades

Barriers to clean energy

The short-term expenses of clean energy upgrades often prevent property owners from reaping the long-term savings of lower electricity bills.

Only a few publicly-backed programs offer low-cost financing to get past this hurdle. To make clean energy more available, more financing options are needed.

The solution: On-bill repayment

A new finance network known as on-bill repayment (OBR) that taps private capital while remaining low-cost.

Securing private capital is key to helping any business sector grow. This is no different for clean energy.

Until recently, though, private capital had been distanced from public programs that offer clean energy financing. Without a wider source of money, these programs couldn’t scale.

Fortunately, this barrier is eroding as more states embrace a financing model known as on-bill repayment. Developed in part by EDF, OBR is a flexible and open-source way to finance clean energy using private, third-party money.

Owners of a wide range of properties can receive financing from a variety of lenders, and upgrades can be small or large in scale, notes Rachel Neil, EDF Energy Policy Fellow, adding it carries no upfront cost to taxpayers.

There is private capital and technological innovation waiting to be used.
OBR makes it affordable and scalable to do so.

Cheryl Roberto] Cheryl Roberto Associate VP, Clean Energy

Hawaii next to launch OBR

Hawaii likely will be the next state to offer OBR, and it is sorely needed: State residents and business owners have the highest electricity bills in the U.S.

Several years ago, Hawaiian policymakers turned to EDF and other experts for a scalable way to lower the upfront costs of clean energy upgrades. The result: The Green Energy Market Securitization (GEMS), a statewide financing program that uses private capital. It is set to launch widely in late 2014 or early 2015.

Savings must outweigh financing costs

energy efficient windows

With an on-bill repayment loan, property owners can install energy-efficient windows to reduce heating and cooling demands.

Photo credit: BerkeleyLab/Roy Kaltschmidt

OBR is appealing to lenders because loan holders are unlikely to skip paying their utility bill, to which the loan is attached. OBR also includes two other features that make it uniquely poised for expansion.

First, repayments stay with the property’s utility bill, regardless of whether it changes owners. Second, the savings from the upgrades must outweigh the financing costs, known as bill neutrality.

“These two aspects not only increase investor confidence, but also make the financing terms more attractive for utility customers, including renters,” Neil says.

Financing models

In general, OBR loans are financed in three different ways, but they can be mixed to provide the best services for a market.

Warehouse model: A program administrator at a utility initially uses ratepayer or public sources to fund the loans, but then aggregates the loans and sells them to a second investor or group of investors.

Upfront model: The program administrator issues a bond or similar contract and seeks investors to provide capital.

Open source model: This sidesteps the need for utility involvement, and allows banks and investors to directly compete for customers, who can still repay the loan via their utility bill.

Where is OBR in operation?

Programs that offer financing for clean energy upgrades are currently operating in 25 states. But only a third of them use at least some private capital to fund loans, and none align as closely with EDF’s recommendations as Hawaii’s.

EDF is building coalitions and securing the necessary regulatory and legislative changes to enact or expand OBR programs in California, North Carolina and Ohio.

Neil is hopeful that open-source OBR programs will spread stateside, since they can be useful tools to help private and public organizations meet the rules of the 2014 Clean Power Plan, and the 2008 private-public National Action Plan for Energy Efficiency.

Follow EDF’s finance and market-based work

Creating ways for private capital to help solve environmental problems is one of several market-based approaches EDF uses to remove obstacles to clean energy.

To see more insights on market-based incentives, follow our Economics posts on EDF Voices:

Economics posts by EDF experts

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