California Dream 2.0

Setting the PACE on Clean Energy Finance

I spend most of my time working to establish On-Bill Repayment programs that allow property owners to use their utility bill to repay loans for cost-saving energy efficiency or renewable energy upgrades.  Many of my colleagues work on a similar program known as Property Assessed Clean Energy (“PACE”), which uses the property tax bill for repayment.  Since both utility and property tax bills are usually paid, both PACE and OBR are expected to lower the cost and increase the availability of financing for clean energy projects.

Last week, I was invited to attend a meeting of the leading PACE program administrators, property owners and other market participants in the country — and was pleasantly surprised to learn how much progress is being made.

Connecticut launched their program in January and is expected to close $20 million of PACE transactions for commercial properties by year end.  The Toledo, Ohio area expects to have executed $18 million of commercial transactions by the end of 2013.  Sonoma County, with a population of less than 500,000, has already completed $64 million of financings for residential and commercial properties.  In late 2012, CaliforniaFIRST launched a PACE program for commercial properties that has already received 130 applications.

We also heard from the head of Keep PACE in Texas who recently sponsored legislation to enable PACE in the state.  PACE, like OBR, uses private funding to allow property owners to voluntarily retrofit their properties.  This makes the program popular with many conservatives and the legislation was able to pass with a unanimous vote from the Texas House of Representatives in May.

Historically, most of the PACE transactions have gone toward financing energy efficiency improvements.  As I wrote in May, Connecticut has set up their PACE program to include financing solar projects as well – using financing structures (leases and power purchase agreements) that tend to provide the lowest-cost solutions for building owners.  Last week, I learned that CaliforniaFIRST and other California-based PACE programs may now be able to offer the same solution for commercial property owners across the state.  This could dramatically increase the availability of financing for solar projects in commercial properties.

Most solar deals are financed over 20 years.  For properties with good credit, this works well as solar photovoltaic (PV) panels have a long lifespan and solar generation can be predicted accurately.  Most government buildings tend to have good credit and can usually finance solar with no money down.  Unfortunately, unless a commercial property is owned or leased by a highly-rated company, the property does not normally qualify for financing.

PACE programs can put an obligation onto the property tax bill that survives all changes in ownership and allows most properties to qualify for credit.  I am hopeful that PACE will be a game changer for solar installations for commercial properties in California. Ultimately, these improvements will save property owners money by reducing their energy consumption, put Californians to work and lower harmful pollution in the process.

Posted in Clean Energy, Energy Efficiency, On-Bill Repayment, Smart Grid / Read 2 Responses

On-Bill Repayment in California: A Step Forward and a Missed Opportunity

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.”

Letter to Brad Copithorne dated July 2nd, 2013

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.”

Letter to Brad Copithorne dated July 15th 2013

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.”

Letter to Brad Copithorne dated June 25th, 2013

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.”

Letter to Brad Copithorne on July 12th, 2013

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.”

Letter to Commissioner Ferron dated August 2nd, 2013

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.”

Posted in Clean Energy, Energy, On-Bill Repayment / Comments are closed

Aloha for Clean Energy Finance: A Tale of Two States

For over two years, EDF has been working to establish an On-Bill Repayment program in California that would allow property owners to finance energy efficiency or renewable generation projects and repay the obligation through their utility bill.  Since utility bills tend to get paid and the obligation could ‘run with the meter’, defaults are expected to be low, which will improve the availability and reduce the cost of financing.  In May 2012, the California Public Utilities Commission (“CPUC”) agreed with our position and ordered the large utilities in California to develop a program for commercial properties.  EDF estimates that this program could generate $5B of investment over 12 years which is expected to support 36,000 jobs

Unfortunately, we are still waiting for the nonresidential OBR pilot in California to be implemented, and if the utilities get their way, we may be waiting for close to another full year.  The California utilities appear to be fearful of change, distributed generation, and the impact of reduced demand.  They have employed aggressive tactics with teams of lawyers arguing and re-arguing every potential issue, even after the issues have presumably been settled by the CPUC.

This stands in sharp contrast to what is happening in Hawaii.  On March 25, the Hawaii Public Utilities Commission (“HPUC”) ordered the primary Hawaii utility, Hawaiian Electric Company, (“HECO”) to establish an OBR program for residential and commercial customers.  I just returned from 3 days in Honolulu and it appears that they are working cooperatively to get the program running in the first quarter of 2014.  This timetable of 12 months from HPUC order to implementation is less than half of what we seem to need in California, despite the fact that the Hawaii program covers a much broader range of property types and relies on public as well as private sources of financing

The difference in timelines seems to be driven by the attitudes of the utilities.  While HECO is working to solve problems, the California utilities are looking to create roadblocks.  I saw this in action last week in Hawaii.

One of the key design elements of an OBR program is a method to allocate the money when a customer pays only part of the bill.  As you would imagine, the utilities generally want to be paid first.  Unfortunately, we have heard from both prospective lenders and rating agencies that this would make an OBR program largely unattractive.  Their concern is that a utility that is getting paid in full might lack incentive to aggressively collect any money still owed to the bank.  EDF has advocated that partial payments be allocated proportional to the amount owed to each party.  That seems fair to us and last May the CPUC agreed and ordered the program be established that way.  Unfortunately, that has not been the end of the story.  The utilities have complained that this was expensive to do (evidently their billing systems are run with an abacus), that this would somehow increase their credit losses (OBR actually has the banks sharing utility credit losses that the utilities would otherwise incur) and, most improbably, that proportional allocation is somehow illegal.

Last week, I braced myself when a HECO representative started talking about how expensive it would be to implement proportional payments.  Besides, since it does not happen very often, why do the banks care so much?  I replied with an explanation of why it mattered and finished with a challenge.  “If partial payments don’t happen very often, why not let the banks get paid first?”

Much to my delight, his reply was, “We have been discussing that option and may very well go that direction.”

HECO is clearly a utility that wants to help their customers reduce utility bills and looks to solve problems.  I only wish our California utilities could develop that kind of can-do attitude to get an OBR program running by early next year.

Posted in Clean Energy, Energy, Energy Efficiency, On-Bill Repayment / Comments are closed

Auto dealers vs. Tesla: Why the market will decide

(This post first appeared on EDF voices)


The European Union, the United Kingdom, Australia and the State of California have all set ambitious targets to reduce greenhouse gas emissions 80% by 2050. Given that a large share of global greenhouse gas emissions comes from transportation (including 29% of U.S. emissions), it will be very tough to meet this goal without “decarbonizing” our cars and trucks.

The most obvious solution is electric vehicles (EVs) charged by clean energy sources like solar or wind. While several startup EV companies – including Fisker, Coda and Better Place – have struggled, the Tesla car company seems to be succeeding. At least that’s the current view of the markets: Tesla shares have more than tripled since March and in May the company raised almost $1 billion in new capital.

Test driving the Tesla

In June, I decided to see what the all the fuss was about and went for a test drive. The Tesla Model S is the kind of revolutionary idea that can only happen when a product is designed with a clean sheet of paper. Most EV designs start with a conventional car and have the batteries stuffed in the trunk or under the seats. A Tesla battery is part of the undercarriage of the car. This lowers the center of gravity and creates a car that handles like a supercar. Tesla also replaced all the buttons on the center console with a 17” touchscreen that doubles as the most beautiful and functional navigation system that I have ever seen. The Tesla received the highest score ever from Consumer Reports for a car and won car of the year from Motor Trend and Automobile Magazine.

Another Tesla innovation is their sales process. Tesla owns their own showrooms. Cars are generally built to order and salespeople are not paid on commission. This allows the company to save a great deal of money by reducing inventory, costs and the profit margin of the middleman (the dealer). Unfortunately, the conventional auto industry is fighting back and they are using dirty tactics by invoking franchise laws.

Push back from dealers

Other than Tesla, most all cars are sold through networks of dealers. The dealers take risks by owning inventory and building local relationships. Franchise laws exist in most states to protect dealers from the risk that suppliers could try to wipe out the value of their investment by cutting them out of the sales cycle. The laws were created to protect a Chevy dealer from GM, not to protect the dealer from someone introducing a better product.

As outlined in a recent article in the Wall Street Journal, gasoline car dealers are attempting to use these laws to prevent Tesla from directly selling cars in Texas, North Carolina, Minnesota and Virginia. I would rather the incumbent car companies spend the effort on designing an EV that can compete with Tesla. If you agree, a petition has been started that asks states to allow Tesla to compete directly.

Sticker shock

One criticism of Tesla is that their products are only practical for wealthy consumers. With a current minimum price north of $60K, it seems hard today to argue with that position. On the other hand, most electronic consumer products tend to be extremely expensive in their early incarnations. How many people had cell phones 25 years ago?

I had the privilege of hearing Stephen Chu, the former Secretary of Energy, speak about the topic recently. He said that at current rates of improvement in battery technology, EVs would be clearly superior to gasoline powered cars by 2020. Chu showed a graph of declining battery prices over time. In 2007, it cost about $1000 to buy a battery that would store 1 kilowatt-hour (kwh) of energy. This is enough to power an EV three to four. In 2012 the market price was down to $500 per kwh and he expected that to be near $200 by 2020. Additionally, he believed that Tesla may be ahead of the game and be currently producing these batteries at around $300 per kwh. The future is coming.

So, how was my test drive? In a word, it was outstanding. The car is fun, fast and stylish. I put my deposit down in June and took delivery in late July. With solar panels on the roof of our house, I am now driving the zero-carbon vehicle of the future.


Posted in Clean Energy, Energy / Read 1 Response

On-Bill Repayment in California: Two Steps Forward, One Step Back

Last week, the California Public Utilities Commission (“CPUC”) issued a proposed decision with the final implementation rules to create the nation’s first On-Bill Repayment (“OBR”) program for commercial properties.  If properly constructed, the program is expected to allow building owners to finance clean energy retrofits with third party capital and repay the obligation through their utility bills.

The good news is the CPUC’s proposed decision contains the vast majority of the program elements necessary to create a flourishing financing market for energy efficiency and renewable projects.  The CPUC ordered robust disclosure to tenants and property owners of any OBR obligation in place, required a centralized program administrator to reduce expenses for market participants, required an equitable share of partial payments between the utility and the lender and agreed that nonpayment of an OBR obligation will result in the same collection procedures from the utility as nonpayment of an electricity charge.

Unfortunately, constructing a successful financing program is much like building a boat.  A boat with 90% of its hull in place will not travel very far.  The proposed decision appears to also have a potentially fatal flaw.  The CPUC has required all subsequent owners and tenants of a property to provide consent to ‘accepting’ the OBR obligation, but does not specifically state what will happen if the consent is not given.

OBR can work for lenders when it significantly reduces risk and simplifies the underwriting decision.  ‘If the lights are still on, then the lender is getting paid’ is a simple rule that will provide significant comfort to ratings agencies and credit committees.  Downtown office buildings and suburban shopping malls are foreclosed on a regular basis, but in almost all cases the lights stay on.  If an OBR obligation is sure to be paid — even after a foreclosure — the availability of investment and cost of financing will improve dramatically.

On the other hand, if repayment is somehow dependent on the next owner and tenant providing consent, then the bank will have a new and unknown underwriting risk.  Furthermore, the bank will likely assume that, given a choice, most new owners would choose not to provide consent.

Based on numerous conversations with financial institutions, EDF believes an OBR program that allows future tenants or landlords to change the nature of the OBR obligations will not generate any meaningful interest from lenders and investors.

Fortunately, the CPUC still has time to get it right.  EDF will be working closely with several financial institutions and project developers to make sure that the CPUC clarifies that a lack of consent will not affect the nature of the OBR obligation.

Assuming we get a good OBR program in place, there is a large group of project developers, lenders, ESCOs, solar investors and other vendors that are expected to participate in the program.  The CPUC proposed decision indicates an effective date near the beginning of 2014.

Posted in Clean Energy, On-Bill Repayment / Comments are closed

Clean Energy Market Poised for Rapid Growth in California

This commentary was originally posted on EDF’s Energy Exchange blog.

Environmentalists and other policy makers have long touted the economic benefits of investing in energy efficiency and renewable projects. For California, that vision is on course to being realized.

Yesterday, EDF, Citi and Wilson Sonsini held Innovations in Energy Efficiency Finance II, a sequel to the successful conference we hosted in 2011. That year, we discussed several interesting ideas about how we might finance projects. Yesterday we heard from sector leaders on how those ideas are being implemented in California and beyond.

Citi and EDF conceived of this event as an opportunity to bring the energy efficiency and renewable industries together to discuss these opportunities and to build momentum for increased transaction flow. Judging by the makeup of the audience, I think we succeeded. I attend quite a few conferences to discuss energy efficiency and most of them are dominated by fellow public policy types. Yesterday, however, was a different story. Of the 185 attendees, over 2/3 were representing private sector companies in the clean energy or financing business.

As former Governor of Colorado, Bill Ritter noted, “California continues to take bold steps toward clean energy and provide the private sector with clear opportunities to invest in energy efficiency and renewables, critical components of our nation’s economic growth. A key part of achieving our clean energy potential, and creating jobs in America, is ensuring access to quality financing for homes and businesses that want to participate in the new energy economy.”

John Kinney, CEO of Clean Fund, described how he used the recently enabled commercial PACE program to complete $1.4M of financing for Prologis’ corporate headquarters in San Francisco last year.

Commissioner Mark Ferron of the California Public Utilities Commission discussed his hopes for the upcoming On-Bill Repayment (OBR) program for commercial properties that EDF has been advocating. We heard from numerous lenders, solar project developers and energy efficiency vendors that will use this program to expand their businesses in California, which will create a robust marketplace for energy efficiency lending and save energy users money in the process.

Cisco DeVries, CEO of Renewable Funding described another program that the utilities are developing to provide low cost loans for residential retrofits. Citi is expected to provide funding for this effort and Cisco is working with networks of contractors to develop go to market strategies.

Senator Kevin de Leon (D-LA) reminded us we still have some public policy work to do as he is sponsoring bills to extend OBR to residential properties (SB 37) and to provide money for retrofits in schools (SB 39). On the other hand, he challenged the private sector to use the tools already in place to create jobs and reduce emissions. We look forward to helping industry meet that challenge.

I want to thank Citi and Wilson Sonsini, our partners in organizing this conference. In addition to their generous financial support for this conference, Citi has consistently proven their commitment to supporting clean energy finance, working to develop this market despite limited revenue to date. I am optimistic that their expertise in this sector will pay off as this nascent market develops into a viable new asset class. Co-sponsor Wilson Sonsini has been providing pro bono advice for EDF on OBR and I can heartily vouch for their skillset and experience in energy efficiency and renewable finance.

It’s dedication like theirs — along with environmentalists and policy makers — that have given California a leg up on developing clean energy financing solutions and provide a successful blueprint for the rest of the country to follow.

Posted in Clean Energy, Climate / Comments are closed