Yesterday, the California Public Utilities Commission (“CPUC”) updated their June 25 proposed decision that included implementation rules for an On-Bill Repayment (“OBR”) program for public and commercial properties. An OBR program allows property owners to finance energy efficiency upgrades on their buildings and repay the obligations through their utility bills. Banks and other private investors provide the funding and borrowers get low interest rates because the obligations are an integral part of the utility bill and, under the EDF proposal, are fully transferable upon change in ownership or occupancy.
The CPUC’s revised decision contains many of the elements necessary for a successful program including making the OBR obligation an integral part of the utility bill through a tariff. Ed Wojtowicz, VP of Finance at Honeywell recently told me, “By integrating the financing charge into the utility bill, we expect that OBR will help many towns, cities and school districts approve money saving energy efficiency projects.” We have heard similar sentiments from other market participants and are optimistic that this OBR program will accelerate money-saving clean energy investments in municipal and school properties.
Unfortunately, our California utilities — PG&E, SoCal Edison and Sempra — have been fighting OBR tooth and nail for the past two years, as they fear that a successful OBR program would increase investment in distributed solar, potentially reduce utility control of energy efficiency programs and allow other companies to have access to the utility bill and customer relationships. Over the past three weeks, the utilities have had ten separate private meetings with CPUC commissioners or staff in an attempt to halt the OBR program.
Californians deserve better.
A well-structured OBR platform attaches to the meter as a tariff-based charge and thus survives changes in ownership. According to an EDF study, such a platform could save California businesses over $37 billion over 12 years in avoided energy costs, would improve the quality of California’s air and environment by keeping 76 million metric tons of CO2 equivalent out of our skies, and provide property owners with the opportunity to choose clean energy solutions that are cheaper than traditional energy.
The California utilities are working hard to keep these good things from happening. As of now, the revised decision does not provide for full transferability of the OBR obligation in the event of a sale or foreclosure.
Why is this important?
While this does not particularly matter for municipal buildings (schools tend not to transfer ownership), we have heard from numerous financial institutions that they will not invest in commercial property OBR projects without full transferability of the OBR obligation. Without transferability, the investment will likely be wiped out in a foreclosure.
Most commercial properties have mortgages and are owned by special purpose real estate companies. Without an OBR program with full transferability, most of these buildings are unable to obtain the credit necessary to invest in renewable generation or energy efficiency projects.
While we are pleased that OBR will increase investment in retrofits of state and locally owner properties, this is only a small part of the potential market. According to a 2010 report by McKinsey & Company, government buildings are projected to make up only 9.6% of nonresidential energy use by the year 2020. The remaining 90.4% of nonresidential energy use will come from private commercial and industrial buildings, for which the proposed OBR program is, unfortunately, ill-suited.
This represents a missed opportunity for California to increase investment in clean energy projects, create jobs, save money for tenants and property owners and continue California’s leadership in the clean energy industry.
The CPUC will be voting on September 19. We hope that they will reconsider and create an OBR program that will create investment in both commercial and public buildings. For energy efficiency financing in California, it would be two steps in the right direction.
What others are saying about the need for a robust OBR program:
Citi, Director, Steve Vierengel:
At the Citi and EDF “Innovations in Energy Efficiency and Distributed Generation Finance II” conference on February 28, 2013, Steve Vierengel, Director at Citi, stated that “automatic transferability without subordination will be critical to the success of an OBR program.”
SolarCity Comments to CPUC filed August 5th, 2013:
“[We] are concerned about a key feature of the PD’s OBR pilot that may frustrate or completely nullify the benefits of OBR or limit the applicability of any lessons learned from the pilot. Specifically, the requirement that subsequent property owners, landlords and tenants (to the maximum extent feasible) will have to provide written consent to the OBR obligation is problematic, particularly following a foreclosure.”
Metrus Energy, CEO/President Bob Hinkle:
“A properly structured OBR program will likely allow Metrus (and other energy services companies) to finance projects that do not qualify today. Survivability of the OBR obligation through a foreclosure, is what separates OBR from a second lien, unsecured loan or other traditional financing products.”
SCIenergy, CEO Steve Gossett Jr:
“If implemented with survivability through foreclosure that is not contingent upon future occupants’ consent, and is not-subordinated to energy charges, OBR may catalyze significant growth in the energy efficiency market.”
Renewable Funding Comments to CPUC filed August 5th, 2013:
“Without a tariff-based obligation that applies to the property until the OBR obligation is satisfied, this pilot will not create a new lending opportunity from the perspective of financial institutions.”
Carbon Lighthouse, CEO Brenden Millstein:
“Carbon Lighthouse has dozens of projects lined up and ready to be executed through the OBR program, but these projects may have difficulty moving forward if the OBR attachment mechanism is not done well.”
Matadors Community Credit Union (MCCU), Chief Lending Officer Mark Tsimanis:
“MCCU believes that an OBR program that survives foreclosure, is not contingent upon consent of future owners or occupants, provides adequate disclosure, and is treated equal to the energy charge on the utility bill may significantly grow the energy efficiency market.”
PineBridge Investments, Vice President Gunter Seeger:
“If the obligation is considered subordinate to the energy charge or does not run-with-the meter through changes in occupancy, then OBR offers no credit enhancement relative to existing opportunities and PineBridge would be unlikely to participate in OBR.”
Alternative Power Capital Comments to CPUC filed August 5th, 2013:
“Attachment of the OBR obligation to the meter via a tariffed charge that applies to subsequent customers on a property transfer, with service termination right for default, has the potential to open up a new market opportunity.”