Models for Financing Clean Energy

Matthew H. Brown

ConoverBrown LLC

Matthew@ConoverBrown.com

720 246 8847

ConoverBrown LLC Consulting firm with a specialty in financing for

clean energy & environmental strategy. Domestic and International government, non-

profit and private clients. Published numerous papers on clean energy

finance – including most recent one for SWEEP. Clean energy finance clients include states,

lenders, national and regional associations and advocacy organizations. Working with these clients to set up new financing programs.

The Goal of Many New Financing Programs is to: Move beyond the small scale pilot to large scale

implementation of efficiency. Make the programs simple to use, with a low

hassle factor. Remove the first-cost barrier to energy

efficiency. Balance credit management with amortization

period: longer loan terms = smaller monthly payments.

Attract low cost capital to finance the program.

How much do most people really care their energy bill?

(Unless you’re a big industrial company, not that much, really)

Considerations for Successful Financing

Simplicity Appropriate to the Need Different market and submarkets need

different levels of complexity. For example:• Mortgage loans require much greater due

diligence than a small $5,000 loan or credit card. • Small business needs for energy retrofits differ

greatly from residential energy retrofits or emergency appliance replacements.

Considerations for Successful Financing Remember the financing alternatives

Home equity line of credit • Typically variable rate product.• Assumes that one has equity in the home.• More difficult to access now than 2+ years ago.

Consumer credit• Typical of a Home Depot/Loews credit card.• Often with a discounted teaser rate that increases dramatically.

SBA 7(a) loans: • May often be for larger amounts than typical business retrofits. • Personal guarantee required of the business owner.

Outline

What we’re financing How we’re financing it

The What:

What will we finance?

Typical Projects Homes

• Home energy renovation based on an audit, insulation/duct sealing, HVAC. Larger project might incorporate solar.

Small Business• Lighting retrofit, HVAC. In some custom cases,

could include small manufacturing with motor or process improvement with new equipment.

How are programs marketed? Most programs are marketed through

networks of contractors. HVAC Electrical “Home Performance” and energy auditors

As a rule (with exceptions) programs marketed by lenders, through government agencies or by utilities have not reached big market share.

Role of Contractors in Financing

For unsecured loans Contractors receive education on the financing

program that they can offer. • Typically give customer a loan application, may do

loan application over the web or through a 1-800 number.

• Customer and contractor know very quickly whether loan is pre-approved.

Secured loans require a longer underwriting analysis and are tied to larger projects.

Typical Value of Retrofits

Homes On very low end, from $2,000-$5,000 On high end, $30,000 if combined with solar

or other major retrofit Average project is around $5,000

• Too large for the average cash purchase or a credit card. Too small for a 2nd Mortgage.

Typical Value of Retrofits

Small Business Variable, with most projects in the range of

$8,000-$12,000. Lighting and some HVAC is typical.

Small manufacturing improvements are custom projects and can run substantially more, or up to $100,000 or more.

The How

What are some potential financing structures?

Customer Contacts Contractor and Arranges for Work Performance

Customer Fills Out Loan Application Provided by Contractor

Lender Processes Loan App

Lender Rejects App

Loan Approved

Contractor Completes Work and Subject to Approval by Customer/Utility, Is Approved for Payment

Lender Pays Contractor

Utility Places Principal & Interest Charge on Utility Bill

Utility Pays Lender Upon Receipt

3rd Party Escrows Loss Reserve

In Case of Default, 3rd Party Pays Lender According to Loss Reserve Terms

A Conceptual Model Under Discussion

Lender Bills Borrower for Principal & Interest

Customer Pays Lender

Customer Contacts Contractor and Arranges for Work Performance

Customer Fills Out Loan Application Provided by Contractor

Lender Processes Loan App

Lender Rejects App

Loan Approved

Contractor Completes Work and Subject to Approval by Customer/Utility, Is Approved for Payment

Lender Pays Contractor

Utility Places Principal & Interest Charge on Utility Bill

Utility Pays Lender Upon Receipt

3rd Party Escrows Loss Reserve

In Case of Default, 3rd Party Pays Lender According to Loss Reserve Terms

A Conceptual Model Under Discussion:

2ndary Market

Lender Bills Borrower for Principal & Interest

Customer Pays Lender

Lender sells loan to secondary market investor Loan Servicer

Bills Customer Customer Pays Servicer

In Case of Default, 3rd Party Pays Investor According to Loss Reserve Terms

Typical Loan Terms

Terms run from 2-10 years for most programs and up to 20 for some, depending on: Small business loans may be shorter than

consumer loans. 24-48 months. Residential may be 48-60 months. Smaller value loans tend to be shorter term. Loans that incorporate solar or more

expensive equipment tend to be longer term.

Influence of Loan Term on Payments

Hypothetical Project Annual Energy Savings: 42,301 kWh Annual Energy Cost Savings: $6,927 Monthly Energy Cost Savings: $577

16 Month Term 24 month Term 36 Month Term Project Cost (net of $7,800 rebate)

$8,835 $8,835 $8,835

Monthly 0% Loan Payment $552 $368 $245 Net Savings (Between Energy Cost Savings and Monthly Principal & Interest)

$25 $209 $332

Source: United Illuminating Company, 2008.

Examples of Loan Term

PA program: up to 10 years. Typical loan is 48 months.

Boulder, CO program is up to 20 years, but is built on a first mortgage lien.

United Illuminating (CT) (Small business program) typical loans are two years but can extend to longer period.

Security and Collateral

Program structures vary. Unsecured loans common in residential

sector for for loans up to $12,500.• Pennsylvania and Colorado use this approach.

Secured loans are more common above this level.

• Most common security is a lien on the house. • Property Assessed Clean Energy Model

Security and Collateral

In many cases, secured loans are not compatible with the market. The market for most loans is a quick-decision

type of market, requiring fast credit analysis or the sale is lost to a less efficient product.

Interest Rates Interest rate

Ranges from 0% to 8.99% for unsecured loans. (CT to PA)

Extremely low interest rates (0-4%) are not necessary in most cases:

• Some of the highest participation programs (Manitoba Hydro, Keystone HELP) are not the lowest rate programs.

• Interest rates and low-as-possible monthly payments are likely most important for residential or small business audit-based energy retrofits.

Loan Servicing

Lender-serviced loans Pennsylvania -- AFC First services loans.

Fannie-Mae serviced loans Fannie-certified loan servicer services loans

under lender-branded name. (WECC/EFS model)

Utility-serviced loans In on-bill financing programs (CT, KS). Most common where utility provides capital.

Origination and Underwriting

Those with capital at risk perform underwriting.

Utility models and Lenders models Utility model – may not look at FICO score,

but looks at internal review. Bill payment, years in business/at same location.

Lender model – relies on FICO score more heavily. 640 and above is typical. Sometimes 700 and up.

Credit and default rates

Credit Enhancements

Loss Reserves are among the most common types of credit enhancements Pennsylvania Keystone HELP program has a 5%

loss reserve ($1,000,000 on $20,000,000) Colorado program, now under bid, has similar loss

reserve set up. Illinois offers a 100% loss provisions. DOE is examining potential for loan

guarantees.

Companion Bill Example

Pennsylvania Keystone HELP

Pennsylvania: 3rd Party Lender Among most successful ee financing: simple and

effective with an innovative capital source. Keystone HELP offers unsecured personal loans at

rates ranging from 4.99%-6.99%. 4.99% for whole-house, audited measures. 5.99% for advanced measures. 6.99% for straight-up ENERGY STAR® measures

Administered by a 3rd party lender that specializes in energy lending.

Delivered through a certified contractor network& 1-800 number.

Pennsylvania: 3rd Party Lender Typical loans are from $5,000-$7,000

over a 4-5 year term. Capitalized with $20 million + from State

Treasurer. Distribution of ~3,500 installations:

Whole-House 10%

Windows/Insulation 30%

HVAC 60%

Manitoba Hydro: On-Bill Loan Most successful loan program in the country with

$200 million through 50,000 loans. Residential sector only.

4.9% rate for all loans is subsidized by utility (non-subsidized rate would be 5.9%). Maximum loan size is $7,500.

Covers insulation, lighting HVAC, windows, doors + others.

Program administered by uitility. But delivered through a strong network of

contractors.

Manitoba Hydro: On-Bill Loan Most successful loan program in the country with $200

million through 50,000 loans. Residential sector only. 4.9% rate for all loans is subsidized by utility (non-

subsidized rate would be 5.9%). Maximum loan size is $7,500.

Covers insulation, lighting HVAC, windows, doors + others.

Program administered by uitility. But delivered through a strong network of contractors. The program uses a streamlined application process.

Borrowers know within minutes if they are approved.

Connecticut: On-bill loan United Illuminating (UI) program is one of the

most successful on bill loan programs in the small commercial sector. Has reached nearly 1/3 of eligible customer base.

UI offers a 0% loan that is paired with rebates. UI-certified contractors conduct an audit and

provide results to the utility. Customer/borrowers apply for loans and are screened for credit worthiness.

Default rates on loans have been less than 1%.

Connecticut: On-bill loan UI is now bumping up against its $4.5 million program

maximum and has asked the utility commission to increase loan maximum to $7 million.

Lighting upgrades and refrigeration make up the majority of the installations. Typical loans are $8-12,000.

The combination of rebates and on bill loan always give the customer a net positive cash flow from day one.

Relationship with contractors has been absolutely critical to program success.