States Forge ahead with On-Bill Repayment for Clean Energy

| FEATURE: Kat Friedrich (Clean Energy Finance Center)

Many new developments have taken place in the area of on-bill repayment (OBR) since the Clean Energy Finance Center published an article last year about these programs. Several states are setting up groundbreaking programs that may influence models for OBR in the future.

OBR is an important mechanism to bring private capital into the market to fund clean energy loans. Utility customers repay these loans through charges on their monthly bills. This is a new adaptation of on-bill financing (OBF), which uses utility capital rather than private capital or other support.

“There’s an increasing dialogue about injecting third party capital… so programs can scale,” said Mark Zimring, a program manager at Lawrence Berkeley National Laboratory. He is writing a national report that will explore lessons learned from on-bill programs and recommend next steps for states.

Zimring said OBR programs are raising a variety of questions. These questions include whether the financing should be structured as tariffs or loans, whether non-paying customers should have their services disconnected, whether programs should be required to yield certain financial results for customers, and whether credit scores should be used for underwriting.

Nationally, programs are using multiple tactics to attract private capital, Zimring said. Some are aggregating loans by setting up warehousing entities. Others are issuing debt that is secured by loans.

Four states – California, Hawaii, New York and Connecticut – are currently developing and refining OBR programs that may serve as models for other states.

California

California has recently introduced a new set of financing pilot programs for its three major investor-owned utilities. These programs include both commercial and residential OBR. A recent decision by the California Public Utilities Commission (CPUC) outlines the overall structure of these programs.

The decision also continues the state’s existing utility-funded OBF programs. According to Frank Spasaro, manager of energy efficiency partnerships and finance at Southern California Gas Company, these programs have been quite successful.

Creating the OBR programs required extensive innovation on the part of the CPUC and many other organizations which had a voice in the decision. The programs will be phased in gradually and will run through 2015.

“We’d like to see on-bill repayment up and running and creating jobs in California in early 2014,” said Brad Copithorne, an energy and financial policy specialist at Environmental Defense Fund.

The state is setting up a financing hub for data management and information sharing. The hub will act as a middleman between investors, utilities and project developers – making utilities’ roles relatively simple. “It’s really hard to ask a utility to pretend to be a bank,” Copithorne said.

Copithorne called California’s OBR solution an “open-source system that uses taxpayer capital.” Each project developer can work with the lender of his or her choice. The solutions will be customized to the projects and can vary from energy efficiency retrofits for small restaurants to solar water heating for multifamily housing.

As the decision demonstrated, setting up OBR pilot programs can be both complicated and controversial. Shortly before the decision was issued, a group of organizations urged the CPUC to make commercial on-bill repayment program loans automatically transferable to property buyers. The final decision does not include this feature. This choice may reduce investors’ interest in lending to businesses.

Hawaii

With broad-based support from stakeholders throughout the state, the Hawaii Public Utility Commission (Hawaii PUC) is introducing an on-bill program for the residential and small commercial market. The program includes features of both OBF and OBR and is expected to launch in the spring of 2014.

“The state has very aggressive clean energy goals – to achieve 70 percent clean energy by 2030 and 30 percent reduction in energy use by 2030,” said Jay Griffin, chief of policy and research at the Hawaii PUC. “Those goals are now in statute.”

Solar power and energy efficiency are highly cost-competitive in Hawaii due to the state’s very high fuel prices. Because Hawaii is an island state, it is very costly to ship fuel there from the mainland United States. These expenses, in combination with the sunny local climate, create an ideal environment for solar power.

“Our market for solar photovoltaics and distributed generation has been extraordinarily robust,” Griffin said.

Griffin said the new financing program will open opportunities for the clean energy industry to expand its reach and connect with low-to-moderate-income Hawaii residents. The misalignment between landlords’ and tenants’ financial incentives has made it difficult for solar power to reach the rental market so far. The new program will not require down payments.

Funds from both bonds and utility ratepayers will support the expansion of both photovoltaics and energy efficiency retrofits. “Solar hot water systems are… quite cost-effective in our environment,” Griffin said.

The program is currently in its developmental stages. Griffin said the program will include a “one-stop shop for managing the flow of capital.” He said the Green Energy Market Securitization program, which is currently being developed, will also set up a separate, new source of low-cost bond financing.

A state agency will be the middleman between the investors, the utility, and customers. Hawaii only has one major investor-owned utility, so it may be easier to set up statewide on-bill programs there than it is in California.

“It’s not a utility-run program per se,” Griffin said. “The financing and program administration side will be third parties. This will be one of the first tariff-based programs that are more or less run by a third party.” He said the state is in the process of lining up a finance program administrator and has already made arrangements with a third-party program developer.

New York

New York’s on-bill recovery financing program, which has been operating since January 2012, provided inspiration for the developers of California’s new pilot programs. The New York State Energy Research and Development Authority (NYSERDA) uses the phrase “on-bill recovery financing” as a synonym for the phrase “on-bill repayment” as it is defined above.

This well-established program is now also using funds from part of a bond issuance rated AAA by Standard & Poor’s. These Qualified Energy Conservation Bonds were just introduced this summer.

According to an e-mail from Jeff Pitkin, the treasurer at NYSERDA, the bond was able to achieve such a high rating because the New York State Environmental Facilities Corporation guaranteed the loans through its State Revolving Fund. Pitkin said they will have a net interest cost of well below 1 percent.

Pitkin and other NYSERDA staff said in an e-mail that the state is currently refining the program so it can reach a broader range of potential participants. Improvements will include an enhanced online interface, new financing criteria, and inclusion of solar power in addition to energy efficiency.

New York has recently enacted new legislation that would allow some renewable energy systems to be funded by the on-bill recovery financing program.

NYSERDA said their new web portal will provide information on program activities to customers, contractors and NYSERDA staff. The portal will also check project eligibility automatically. NYSERDA will use the web portal for quality control and process improvements.

NYSERDA is also reviewing its underwriting standards and revising its criteria for issuing loans because it would like to lower its loan denial rate (which is currently at 30 percent). Currently, about a third of the denials happen because utility customers’ debt-to-income ratios are too high.

Connecticut

Connecticut is in the early stages of developing an OBR program for the residential sector. Public Act 13-298, which authorized the program, was approved on July 8. The program, which will be managed by the Connecticut Clean Energy Finance & Investment Authority, is likely to begin during the spring of 2014.

The legislation includes the following program elements: 1) coverage of energy efficiency, solar, and other clean energy projects; 2) potential disconnection of non-paying customers (with protections for low-income customers); and 3) repayment obligations that are transferable to buyers of property.

The legislation also requires that the cost of repayments not exceed the monetary savings associated with the clean energy measures. (This is also known as “bill neutrality.”)


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