Energy-efficiency loan financing is proving to be a stable, low-risk investment with low default rates and large-scale potential, according to a report that the American Council for an Energy-Efficient Economy (ACEEE) released late last month.
A review of 24 energy-efficiency loan programs found default rates ranging from 0 percent to 3 percent throughout the life of the financing program, a range that ACEEE characterized as “extremely low.” Default rates for efficiency loan programs have also remained largely unchanged, even during the near collapse of the real-estate market over the past few years, the advocacy group noted.
“Energy-efficiency loans are proving to be a winning investment in a time of economic uncertainty,” ACEEE Executive Director Steven Nadel said. “Based on these findings, now is the time to scale up to serve many more homeowners and businesses.”
Energy-efficiency loan programs finance building upgrades by providing funding directly to building owners or managers. These projects lower energy bills and reduce annual energy costs by an estimated average of 12-17 percent. Small commercial banks and credit unions have led in offering these energy-efficiency loan products, often working with utilities as well as local and state governments. The programs evaluated by the ACEEE report have loaned out more than $1.5 billion. Through the use of subsidies and energy program funds, interest rates for borrowers averaged 3-5 percent per year.
Existing loan programs have only begun to scratch the surface of the potential market, ACEEE stated. “The programs reviewed represent the largest energy-efficiency financing efforts in the nation, yet participation rates are most often less than 0.5 percent of the targeted customer class.”
"These low participation rates indicate there is a vast untapped customer base still available in this market,” said Sara Hayes, the report’s lead author. “I think we'll see increased private investment as big banks adopt the model that community banks and credit unions have found so profitable.”
ACEEE believes the reasons for the lack of investment by large banks up to this point appears to be a lack of centralized information on how the loans are performing and the inability to evaluate default risks. “Furthermore, each loan tends to be small, averaging approximately $9,000 for residential projects and $73,000 for commercial/industrial/public projects. The low dollar amounts of these loans suggests that in order to attract the interest of large financial institutions, the loans would need to be packaged for resale on the secondary market.”
“The financial sector has shown itself to be extremely adept at scaling programs that serve customer needs well,” said Joel Freehling, senior energy finance consultant at Shaw Environmental & Infrastructure. “Consider, for example, the growth in the performance contracting and green building finance markets. It’s finding the right place to start and locating the right partners that often stymy further growth in the energy-finance field. If these hurdles can be overcome, we could see huge growth in these programs.”
Report’s Lead Author Provides GBI Additional Details
In an interview with Green Building Insider, Hayes provided the following additional information:
GBI: What are the most common types of energy-efficiency upgrades being made through these loans? Mostly installation of energy-efficient lighting?
Hayes: That is going to vary by loan. The majority of programs we looked at were residential. It could be lighting. It could be air sealing and insulation, which are frequently included in these programs. It could be appliance upgrades or furnace replacements, new windows. Those are just some examples. They’re not necessarily going to be the same across all programs, but those are common residential measures that are included in these programs.
GBI: The press release announcing the availability of the report suggested that increased private investment in energy efficiency through loans is on the way. When will this increase probably occur, and how much of an increase is there expected to be?
Hayes: I could not answer either of those. I would say rather than characterize it as an expectation or a prediction that private investment is going to increase, I would say that it is an opportunity, and there are lots of people engaged with trying to motivate the private sector to become invested, more invested. One example was last week, [in which] the Carbon War Room partnered with Barclays, and they announced in California that they’re going to be funding these kinds of energy loans for commercial buildings in California. That’s one opportunity where things seem to be moving forward. I know that some congressional offices are considering [ways] to encourage the private sector to invest, and one way they might do that is by offering a ‘loan lost reserve.’ The government would put some pool of money aside to serve as a loan lost reserve in case people defaulted on these loans, and that kind of acts as a guarantee so that private banks have less risk when it lends to people. We’re expecting legislation that would do this to be introduced in Congress in October.
I think there’s an opportunity [for increased investment]. I think this opportunity has been there for quite some time, but now we have some new results that show that default rates are really low. We also have a housing market where people are being more tentative in what they invest in, and there just aren’t as many high-performing investment opportunities in the way that there was maybe 5-10 years ago. And if this is one where the market hasn’t really been, you know, there’s a lot of potential for a large-scale number of loans, and the default rate is low, the risks are low, it could be really attractive right now.
GBI: Even though much legislation addressing energy efficiency has had bipartisan support, it is uncertain whether Congress will pass such a bill.
Hayes: I’ll give you an example of how unreasonable Congress has been lately. There was a negotiated agreement, which is being referred to as ‘INCAA’ [the Implementation of National
Consensus Appliance Agreements bill], and all of the appliance manufacturers agreed to it. They wanted it. They all signed on. There’s no political issue here…. There was a consensus agreement. And everybody who participated agreed. And it went nowhere. It would be so easy for both sides to say, ‘Look, here’s a win. We passed some legislation. We’re going to create jobs and save money,’ and it’s just not happening. What do I think the likelihood is [of the upcoming legislation passing]? It’s hard to say. But it’s definitely a bipartisan issue. It’s something that’s attractive to both political parties.
GBI: One of the reasons cited for a lack of investment by large banks was a lack of centralized information on how the loans were performing. In your opinion, who should be doing what to create such a database of information? Has your organization formally made recommendations to such an entity yet?
Hayes: I think the answer to the last question, as far as I’m aware, is ‘No.’ We have not made a formal recommendation. There’s a piece of legislation that’s being vetted right now or passed around, called SAVE [the Sensible Accounting to Value Energy bill], which would require energy use to be factored in in the property assessment for the purchase of a new home. And that would be one way to kind of get at this information although that’s not the performance and loans per se, it’s just valuing the performance of the efficiency measures into the financial transaction. The [U.S.] Department of Energy is working on putting together a tool for risk assessment …, but I’m not sure about what the status of that tool is. This report was one of many pieces that they were pulling together to try to provide that information. The federal lenders, like Fannie Mae and Freddie Mac and mortgage institutions, they all have energy-efficiency loan products, and they’re national, so reporting of that information would be really useful, and they don’t really make it available. That would be helpful.
GBI: When will any follow-up studies on this topic be conducted and released?
Hayes: The bigger project, the DOE project, I’m not sure about. We are releasing a follow-up report, I think in November, that focuses on on-bill financing, so one of the recommendations in this last report for getting people to participate, broadening these markets, was to make the programs so that they’re on-bill, which means the utility bill comes each month, and it includes the loan-repayment in the utility bill, the loaner payment for the efficiency measures. You can limit the efficiency measures so that they pay for themselves, and many of them do, in a relatively short time. You can make it so that the utility bill doesn’t actually increase so that the payment for the loan is less than the savings that are generated through the efficiency measures. We’re doing a report, and there are a bunch of states that already have these programs in place, but it is a relatively new effort, so even though there are [many] states doing it, it’s just a couple of years [off] the ground so far, and I know that there’s an on-bill piece of legislation that’s supposed to be proposed in Congress.
GBI: Other comments?
Hayes: One thing you might want to mention that isn’t really emphasized in the report but did come up a lot in the research [is that] the experience and training of the contractors involved in the programs was really important. And a couple of programs really had to emphasize it….