Category Archives: On-Bill Repayment

PACE Financing for California’s Clean Energy Future, Part 1: Expanding the Residential Market

rp_Scott_Hofmeister-287x377.jpgWhen it comes to protecting the environment and fighting climate change, California has always been a first mover.

Now the state is boldly acting to unleash a new market that saves energy, cuts pollution, and drastically increases clean energy investment for California’s residents.

Last week, California approved a $10 million reserve that will revive the Property Assessed Clean Energy (PACE) program for residential customers.

PACE allows customers to take advantage of energy saving upgrades to their home with no money down. Customers simply use a portion of their savings to pay off the investment over time through their property tax bill. Financing can be entirely provided by private lenders at no cost to taxpayers.

Since its first use at a San Francisco office building in 2012, PACE has been a resounding success in the commercial sector. In fact, the commercial markets have quickly taken to PACE and continue to set new deal-size records.

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Hawaii Taps On-Bill Repayment Program for Clean Energy Financing and Job Creation

 

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(This post originally appeared on the EDF's Energy Exchange blog)

EDF has been advocating for states to establish On-Bill Repayment (OBR) programs that allow property owners and tenants to finance clean energy retrofits directly through their utility bills with no upfront cost. California and Connecticut are working to establish OBR programs, but Hawaii is expected to beat them to the punch. Hawaii’s program is critical as electric rates are about double the average of mainland states and most electricity has historically been generated with dirty, expensive oil.

Given the potential of OBR to lower electricity bills, reduce that state’s carbon footprint, and expand job growth in the clean energy sector, EDF has been working closely with Hawaii and multiple private sector investors for the past year to develop their OBR program. Once formally launched later this spring, Hawaii’s program will be one of only two in the nation, preceded by New York who enacted their program in 2011.

OBR in a nutshell

Here’s how OBR works: Banks and other private investors team up with contractors and project developers to create competitive options for installing energy efficiency or renewable generation projects. Linking the repayment to the customer’s utility bill is expected to lower financing costs, increase availability of credit for projects that might not otherwise qualify, and allow owners to finance long payback projects without fear of needing to refinance if they sell the property. Read More »

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On-Bill Repayment & Community Solar: Clean Energy Investments Underserved Californians Can Afford

It sounds like the opening line of a joke: What can finance do to reduce inequality?

However, this is exactly the question I tried to tackle during my presentation at the Clean Power, Healthy Communities conference last week. Hosted by the Local Clean Energy Alliance, this annual conference focuses on equitable, community-based clean energy solutions for the Bay Area.

In keeping with this theme, I took the opportunity to explain how On-Bill Repayment (OBR) can increase access to energy efficiency and distributed generation installations for low and middle-income families. By overcoming cost barriers, OBR can deliver energy savings, cost savings, jobs and more comfortable and healthy homes to underserved communities. In addition to these tangible benefits, it offers residents greater control over energy generation, as well as their energy consumption.

While I was able to share EDF’s finance work with community organizers and other environmental advocates, the conference was also a chance to hear about and discuss variety of other community-based solutions. One initiative that OBR has tremendous potential to support and complement is community-owned solar. Signed into law in September, California’s Senate Bill 43 allows for shared ownership of renewable generation. This means that individuals who are unable to install solar panels at their residences can invest in an off-site solar system, and receive credit on their utility bill for their share of the power generated.

OBR could support community-owned solar by helping low-income households finance the subscription cost, also through their utility bill. This simultaneously provides convenience for customers, and increases solar providers’ confidence in low-income subscribers’ ability to repay.  Residential OBR programs would require the savings from solar generation to exceed the subscription cost, ensuring lower net utility bills for struggling consumers.

As EDF continues to develop energy financing opportunities like OBR, partnerships with local organizations and advocacy groups are essential. Moving forward in California and other states, EDF hopes to tailor OBR to complement local initiatives, like community-owner solar, to ensure that OBR deliver results for underserved communities.

So, what can finance do to reduce inequality?

Punch lines aside, it can increase access to cleaner, cheaper energy, deliver investment and jobs, and expand the opportunity to own renewable generation technology to credit-strapped communities. By working with local partners as we develop financing tools like OBR, EDF can help shift the energy economy towards a more sustainable and equitable future.

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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.

Also posted in Clean Energy, Energy Efficiency, Smart Grid | 2 Responses, comments now closed

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.”

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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.

Also posted in Clean Energy, Energy, Energy Efficiency | Comments closed

California’s Capital Leads the Nation in Energy Efficiency Financing

By Kate Daniel, EDF Climate Corps Fellow

Kate Daniel, Climate Corps Fellow

Great news for California and the future of energy efficiency in Sacramento.

Today I took part in an announcement by Sacramento Mayor Kevin Johnson unveiling the nation’s largest Property Assessed Clean Energy (PACE) project in the country — and potentially a huge boost for businesses in the state’s capital.

Launched by Clean Energy Sacramento, the property owners of Metro Center, Metzler Real Estate, will now be able to take advantage of PACE financing to fund $3.1 million in energy efficient upgrades, including high efficiency rooftop units for heating and cooling and a state-of-the-art building management system. Ultimately, these upgrades will save $140,000 in annual utility costs for the property.

This project is not just good news for Metro and Metzler, but for the entire Sacramento region. Here’s how it works: Under the PACE program Metzler will receive private funding from Ygrene Energy Fund, who covers the upfront costs of the project Metzler pays the costs back on their property tax bill while Johnson Controls will design and implement the upgrades.

Why PACE?

For starters, PACE – and other innovative financing mechanisms like on-bill repayment (OBR) – offers several key advantages over traditional energy financing. First, the financing is tied to the property itself, rather than to the owner. This means that if the owner wanted to sell the building, it would not have to pay off the balance of the financing, but rather transfer to the next owner’s property tax bill. By doing this, PACE addresses a key obstacle in commercial real estate markets: frequent ownership turnover where owners are hesitant to make long-term investments.

Kate Daniel and Mayor Kevin Johnson at the announcement

It also means qualification for the financing is based on the value of the Metro Center property, not Metzler’s credit. Many properties can qualify for PACE financing that would not otherwise be able to obtain the capital necessary for a retrofit. PACE also addresses the biggest barriers to energy efficiency retrofits in commercial buildings. An annual survey by the Institute for Building Efficiency shows that available capital is the most common obstacle to making energy improvements. With PACE financing, the upfront costs of the project are financed externally, and don’t draw from funds that could be used for other projects or investments.

The next most frequently cited barrier to taking on energy efficiency is making a sufficient return on investment. This is where Clean Energy Sacramento’s low-interest rates come into play. Property owners also have the ability to extend the financing as long as 20 years, far longer than most real estate or construction loans. These features of the financing make individual payments lower, so the company can realize the benefits of energy savings immediately.

Lastly, PACE financing can address the split incentive problem, when property owners aren’t motivated to pay the costs of upgrades that save money for their tenants, who pay the utility bills. Under most commercial leases, property owners are able to pass on property taxes to tenants, so the current tenants would make the PACE payments, while still realizing savings on their utility bills.

Clearly, the Metro Center upgrade is a good deal for Metzler and the Center’s tenants, who realize the direct benefits of energy savings and increased property value and comfort.

Fortunately, the City of Sacramento gets why this is important to the rest of us. Energy retrofits keep contractors busy and working. The Metro Center project itself will create 50 jobs in the Sacramento region and upgrades to Metro Center will make the space more appealing for tenants, attracting and retaining businesses in the area – all without spending public dollars.

The Metro Center project is a telling example of just how much a well-executed PACE program can provide for a community. Through my EDF Climate Corps fellowship, I’ll be working to help make these types of projects a reality across the region.

 

Also posted in Clean Energy, Climate, Jobs | 2 Responses, comments now closed

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.

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On-Bill Repayment Bill Introduced In California

Yesterday, California Senator Kevin de León introduced a bill, SB 37, which would create the first On-Bill Repayment (OBR) program entirely financed by private capital. OBR allows property owners to finance energy efficiency and renewable generation upgrades and repay the obligations through their utility bills.

Senator De León said that “every Californian should be able to participate in the clean energy economy, and OBR helps us achieve this goal.” He believes that “OBR will lower utility bills, reduce pollution from dirty energy, and put thousands of Californians back to work. I am proud to be working with a broad coalition dedicated to moving this bill forward."

This bill will authorize the California Public Utilities Commission (CPUC) to extend their groundbreaking commercial OBR program to residential properties. (The commercial program is expected to be effective by the end of March and was recently profiled in the New York Times.)  We expect the residential program to provide retrofit capital to consumers that might not otherwise have access to low-cost funding for retrofits. These retrofits are expected to save money for consumers after financing costs and in many cases allow for more comfortable, healthier homes.

EDF is committed to working with consumer groups to make sure that this bill includes appropriate consumer protections. We will also be working to expand a coalition of supporters from the environmental, labor, business and financial communities.

Also posted in Clean Energy, Smart Grid | 1 Response, comments now closed

On-Bill Repayment Approved by California Public Utilities Commission

Last week the California Public Utilities Commission (CPUC) approved energy efficiency programs and budgets that include an innovative On-Bill Repayment (OBR) program.  The OBR program will allow commercial property owners to finance energy efficiency or renewable generation upgrades for their buildings and repay the obligation through the utility bill.  The program is ‘open-source’ and is designed to allow a wide variety of contractors, solar installers, and energy efficiency project developers to work with a range of financial institutions to design offerings that best meet the needs of their customers.

The CPUC approval was highlighted today in the New York Times.

In the decision, the CPUC reiterated their intention to have the OBR program operational by March 2013.  We understand that some of the utilities have expressed concern that this timeline is aggressive, but were pleased that the CPUC decision noted that the utilities have been aware of this timeline since the original CPUC decision last May. 

A predictable timeline for OBR implementation is critical as EDF is working closely with multiple market participants to create a pipeline of projects that can be executed as soon as the program is operational.  A successful launch will allow us to demonstrate to other states that OBR can create private investment and new jobs at no cost to ratepayers or taxpayers.  We believe that this is a message that will resonate across the political spectrum.

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