On-Bill Financing Programs
Overview and Key Considerations for Program Design
Advantage: Broader Customer Eligibility
These two unique features of on-bill loans -- the tie to utility service and the bill neutrality test -- should generally work to improve the likelihood of repayment and reduce risk of loss for a lender, relative to similar loans without such features. Supporters of on-bill programs argue this will enable utilities to extend credit to certain customers who would not otherwise be eligible for conventional financing without assuming undue repayment risk, especially if other creditworthiness factors for eligibility are used, such as traditional cash flow analysis, evidence of performance on other debt obligations, credit scores, and on-time utility payment history.
For example, many customers are not eligible for conventional loans due to factors such as having limited assets, being an unrated commercial entity, not having available property for security, or not having sufficient equity in the property to support a secured mortgage. In many instances, customers ineligible for a conventional loan will be a good repayment risk because of bill neutrality and because the payment is billed on the utility bill. Results to date from existing programs suggest on-bill loan programs do, in fact, produce loans with low default and delinquency rates, as indicated by the results of the California program.
By enabling efficiency projects to customers who otherwise would not have access to conventional loans, a utility can most directly achieve the core purpose of the program: increasing efficiency improvement projects among customers.
For Institutional Customers, a New Option To Invest In Efficiency
Many schools, local governments, state governments, and other institutions own or operate large amounts of building space and have substantial opportunities for efficiency. For many institutions, funding capital improvements through budget expenditure or other debt can require lengthy and burdensome processes. Many institutions have policies that permit participation in utility operated on-bill programs because of the utility's unique position and role in evaluating the legitimacy of the project and determining that energy savings are likely to exceed the associated payment. The Federal Energy Management Program also has issued specific guidance related to participating in utility programs with certain features to make improvements.8 The availability of on-bill programs may enable some institutional customers to implement efficiency projects that would otherwise go unrealized.
Advantage: Aligning Owner & Tenant
In many buildings, the cost of utility services are borne by tenants, either directly with separate utility meters or indirectly with the owner passing charges on to tenants based on square footage or some other formula. This is true of many commercial office buildings and multi-family buildings. The tenants collectively realize the diffused benefits of efficiency improvements to central systems and building features, but the owner typically bears the concentrated cost of those improvements. This works to discourage the owner from making sensible investments in efficiency. With an on-bill arrangement, some building owners will be in a position to invest in improvements if the monthly on-bill charge is passed to the tenants, because the benefits of the improvements -- lower energy usage -- will also be realized by the tenants.
Commercial tenants, if targeted at the time of build-out, could be well-positioned to invest in efficiency with an on-bill program. Many tenants with multi-year leases in commercial buildings have strong economic interest in improving the efficiency of the space and the building. And, even if a tenant has access to funds internally or from conventional credit, investing in the efficiency project would compete with internal uses for the same funds. Since repayment is on the utility bill and the loan proceeds may only be used for an eligible efficiency project, an efficiency investment may not be seen by the customer as competing with other uses for the funds.
Direct Advantages and Market Transformation
By extending credit to customers, an on-bill program can achieve direct results in terms of implemented efficiency. There is also significant potential through market transformation–the important effect achieved over time by demonstrating to conventional lenders the market advantages of supporting energy efficiency lending products. Strong loan performance among on-bill loans, along with other program information, could potentially persuade some conventional lenders to account for energy savings in the underwriting process and to offer a loan product tailored to fund efficiency projects, without large amounts of utility or public contributions.
As with any new class of loans, private investors who fuel lender activity through secondary markets are likely to require information on a large number of loans, seasoned over years, to identify the many lending parameters and underwriting terms that will produce a flow of loans with regular, predictable performance. In addition ratings from recognized agencies are often required to make substantial investments. It is a process that could require a long period of examination. Nonetheless, the market transformation potential of on-bill programs should be considered and valued in the program design process. There is promising evidence that this process is underway for on-bill loans, because of the leadership of the several utilities with active programs.
last revised 8/8/2012
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