Utility On-Bill Repayment

August 2015

Harcourt Brown & CareyDesigns clean energy finance programs for government, utility and commercial clients. We:• Define goals and objectives• Establish client risk assumption and cash

resources• Identify sources of funds• Develop the financing instrument• Define data and reporting• Assist with program launch

Goals of this PresentationFocus on the California experience:

1. Provide background for California’s EE financing

2. Review Policy Issues 3. Review Implementation Issues 4. Provide Lessons Learned and

Recommendations

The Elements of On-Bill Repayment Utility On-Bill programs generally address the following:1. Eligible Market sectors2. Eligible technologies and measures 3. Source of funds (internal vs. external) and Funders (single? Multiple?)4. The instrument (loan, lease, service agreement etc.)5. Credit enhancements6. Bill impact requirements 7. Underwriting8. Security and collateral 9. Qualifying rates and terms10. Origination and servicing11. Open market vs. closed participant structure12. Transferability13. Payment distribution, delinquencies, defaults and disconnect14. Data, data privacy and reporting15. Program QA/QC

Background

Why Is California focusing on financing incentives? The State PUC, legislature and administration created an EE strategic plan that:

– Establishes energy efficiency as the highest priority in meeting CA’s energy needs

– Serves as a framework for making EE a way of life– Will show how CA will use EE to grow its economy– Residential new construction will be zero net energy by

2020– Provides that commercial new construction will be zero net

energy by 2030– Provides for the needs of low and moderate income

customers that low-income customers

Why Is California focusing on financing incentives? (cont.)In 20011 HB&C conducted a study for the CPUC concluding that CA could not achieve these results with the existing rebate/incentive programs.

– CA’s current annual EE spending is approximately $2 billion per year (not including customer contribution)

– To achieve the incremental goals would require a total investment of approximately:

• $5.5 billion per year in the residential market • $2.5 billion per year in the institutional/commercial

market• $2 billion per year on the industrial market

Why Is California focusing on financing incentives? (cont.)The PUC issued a Guidance Decision and Final Decision. These actions concluded that:

– Financing is important to meeting the goals – IOUs should hire an expert to make recommendations – Hold workshops to review the expert's conclusions – Recommendations made in late 2012– The IOUs should develop scalable and leveraged financing products to

stimulate increased EE – Utilize a “hub” to create an open market and to coordinate the state-wide

activities associated with the flow of funds and data– The “hub” will be embedded in the CA Treasury for reasons of control and

experience with similar functionality– The programs will be offered to all market sector programs and will be

phased in over a two year period

The California Structure: BasicsCalifornia’s financing programs have a number of foundational elements:

– Utilities are not financial institutions– Rely on multiple private capital sources to fund loans, leases

etc. – Use ratepayer funds to attract that private capital, where

necessary – Leverage the benefits of the utility bill to to bring down rates,

improve terms, broaden underwriting – Attempt to maximize simplicity to greatest extent, for lenders,

participants. • “Absorb” the complexity behind the program, to achieve

this goal– Conduct large scale pilots to test the value of financing

Sector Pilot Type Credit Enhancements

On-Bill Repayment

Disconnection

Residential

Single Family $21 million Optional in PG&E Territory

No

Master Metered

Multi-Family$2 million Yes No

Commercial

Small Business-

Loan/Lease$10 million Loans – Yes

Leases - Optional

Loans – YesOBR Leases –

YesOff-Bill Leases -

No

Non-Residential

On-BillNone Yes Yes

CPUC Decision

California Hub for Energy Efficiency Financing

Customer ContractorsIOUs

Participating Lenders

 

Repay

ment (N

on-

OBR/Non

-EFLIC

)

ProjectInfo

CustomerInfo

Account Info andOBR/EFLIC Payment

Remittance

 

OBR

/EFL

IC

Billin

g In

form

atio

n

Loan/Lease Enrollment Applications and

Claims

 

OBR/EFLIC Payments& Loss Reserve Reimbursements

 Energy (and OBR/EFLIC) Payments

California Hub for Energy Efficiency Financing (CHEEF)

Policy Issues

On Bill Program Elements and Policy Considerations• Market Sector

– Should the program target all sectors residential, multifamily, institutional, commercial and industrial?

– How and to what extent to address low/mod income?– Where are the major gaps and opportunities for greatest efficiency and

greatest role for financing? • Source of funds

– Is there a direct role for ratepayer funds as credit enhancements; as funds directly invested in projects?

• Eligible improvements– Given that ratepayer funds support infrastructure development and credit

enhancements, will all the same eligibility rules apply to financing programs as apply to other eligible improvements?

– What mix of eligible and non-eligible EE measures will be allowed? – What documentation will be required to demonstrate rule compliance?

On Bill Program Elements and Policy Considerations (cont.)• Transferability

– What circumstances will allow for a payment obligation to be transferred? – Will all financings be set up so that they must transfer from existing to

successor occupant? – Or will they be set up as an option? – How will this decision affect FI participation? How will it affect

underwriting?• Payment distribution (Addressing partial pays and late payments )

– Are ratepayers paid first, in case of partial pays? In subsequent months of partial pays, who is paid first? Waterfall??

• Disconnection for non-payment– Is there a value to OBR in the absence of disconnection?

• Uncertain value, but begin tested through a sub-pilot. – What market sectors will be allowed to be disconnected?

• Residential disconnection very challenging in California, for non energy charges

On Bill Program Elements and Policy Considerations (cont.)• Eligible instruments (loan, lease or service agreement)• Bill neutrality

– Will bill neutrality be a requirement for projects to qualify for financing?

– What impact do bill neutrality requirements put on program uptake, eligible project?

– If it is not required for all market sectors, should it be required for some (e.g. Multi-family)?

• Subsidy levels – Compensate utility for “use” of the bill? – Who pays fees to whom (lenders, customers, contractors, IOUs)? – Provide credit enhancements, in what form and for which markets?

Implementation Issues

Implementation Issues• Credit enhancement structures

– What level of credit enhancement actually buys a lower rate, longer terms or better underwriting?

– What results could be expected from different levels of credit enhancement for the residential, commercial, multi-family or other sectors?

– What types of capital providers will provide a benefit for a credit enhancement?

• Eligible customers– Must a customer be current on the utility bill at enrollment? Define

“current.” – Who will assure that currency? – In cases where an obligation transfers, must a new “successor”

customer also be current?

Implementation Issues• Data Collection

– What data will be collected and in what form (data dictionary)?– Who will collect and ultimately receive the data?– How will it be organized, managed and shared (data schema and platform)?

• Sharing permissions?– What forms will be required prior to sharing information? Placing charge on the utility

bill? – What level of verification of permissions forms will be required? What will be required

prior to allowing a charge to be placed on the bill? • Data privacy and security?

– What data will be shared with the administrator? – At what level of aggregation will data be collected? Presented? At what level of

permissions will data be available to different parties? Who will be able to view/possess data?

• Data Transfer– Through what means will data be transferred between utility and the administrator? – How frequently will that data be transferred (daily/monthly/annually)? – How will the transfer of data about exceptional events be addressed?

Implementation Issues• Through what means will data be collected?

– Forms - electronic, fillable, etc.? – Who will collect and ultimately receive the data?– How will it be organized, managed and shared (data schema and

platform)?

Data Flow

Implementation Issues• IT issues

– What existing IT structures can IOUs leverage to build out OBR? – What new requirements will IT systems need to meet for reporting

purposes? For operational purposes? – With what frequency must files be generated/transmitted? – How much can IT systems be automated as opposed to addressing

functional needs through manual operations?

Data Protocol

File Transmittal Flow

Final Observations • The devil is definitely in the details • The most controversial issues have been:

– Transfer of payment obligation – Applicability of on-bill to the res sector – Specific rules currently applying to use of ratepayer funds,

and applicability to financing programs • The most challenging issues to address have been:

– IT– Data privacy, aggregation, security – Marrying requirements on utility ratepayer funds with the

desire for strong deal flow

Final Observations • The market for OBR is developing quickly

– When we started this effort, few if any finance firms understood or had an interest in OBR

– Now, that number has increased substantially • The benefits of OBR definitely depend on the

structure of OBR – Is OBR just a collection mechanism, with finance

collections subordinate to utility charges? – Or is OBR a mechanism that provides most of the

benefits of utility charge collection to the finance charge?

Process Flow

Thank YouContact:

Matthew Brownmatthew.brown@harcourtbrown.co

mDave Carey

dave.carey@harcourtbrown.com