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On-bill financing programs are a promising way for utilities to help customers invest in energy efficiency improvements, such as adding insulation, installing new lighting, or upgrading to a high-efficiency air conditioner. These improvements can reduce utility bills, improve the value of the property, create new jobs, and deliver efficiency to the utility, which works to lower energy bills for everyone and reduce pollution. Because efficiency delivers so much value, many cities, states, and utilities are seeking innovative ways to help customers invest to improve the efficiency of houses and buildings.

The potential of on-bill programs to enable efficiency investments has persuaded many utilities, regulators, and other stakeholders to explore whether to implement new on-bill programs, expand existing programs with more funding, and recruit financial institutions and other investors to potentially fund on-bill loans.

The purpose of this issue brief is to explain why on-bill programs are promising and to describe key benefits and challenges utilities and other program administrators should consider when exploring an on-bill program. By taking stock of these considerations on-bill programs may be tailored to the customers most likely to use them to invest in efficiency and operated in a way likely to provide cost-effective efficiency for the utility and its customers.

What is On-Bill Financing?

On-bill financing refers to a loan made to a utility customer -- such as a homeowner or a commercial building owner -- to pay for energy efficiency improvements to the customer's house or building. The regular monthly loan payments are collected by the utility on the utility bill until the loan is repaid.

On-bill programs have been used by U.S. utilities for many years. National Grid has offered an on-bill program for small business customers since the 1990s. United Illuminating in Connecticut offers on-bill loans to commercial customers. San Diego Gas & Electric, SoCalGas, SoCal Edison and Pacific Gas and Electric all operate similar on-bill loan programs for commercial customers. New York State passed the Power NY Act in 2011 authorizing residential on-bill loans, which is being implemented by the New York State Energy Research Authority (NYSERDA) in cooperation with New York utilities.

An on-bill program may be administered by the utility directly or by a state energy office or other similar entity in conjunction with the utility. New York's program, for example, is administered by the New York State Energy Research Authority (NYSERDA) in cooperation with New York utilities. A program could be limited to particular types of customers, such as commercial building owners, commercial tenants, residential homeowners, or could include them all.

In most on-bill programs, the loan funds are provided directly by the utility or program administrator and the repayment risk is held by the same entity. One possibility is for an outside lender such as a financial institution to originate and fund the on-bill loans, while the utility would provide certain payment processing and servicing functions. This arrangement could present many advantages, but it also raises additional questions (discussed further below). This type of arrangement has received considerable attention recently, and some have deemed the arrangement "on-bill repayment" instead of "on-bill financing" to distinguish the two types of program structures.

A New Kind of Loan

Today, conventional lenders and financial institutions offer loan products that many homeowners and building owners could use to finance efficiency improvements. The purpose of an on-bill program is not for the utility to serve as an additional source of capital for conventional loans. Rather, on-bill loans are different from conventional loans in two fundamental and important ways:

• The loans are tied to utility service. In many on-bill programs, the utility may suspend service to the customer for non-payment of the loan payment. The threat of utility disconnection is likely to be a strong motivator for customers to make regular loan payments.
• The loans account for the borrower's utility savings. Many on-bill programs require customers meet a bill neutrality test to be eligible for financing. This means an energy auditor reviews the efficiency improvements and estimates the reduction in utility expenses expected after the project. The expected savings must equal or exceed the new on-bill loan payments to be eligible for an on-bill loan. The idea is that the utility will only make loans to customers whose total utility bill after the project, including the new loan payment, according to the model, will be reduced on an annual basis. Conventional lenders typically do not assess or consider the expected savings on utility bills from a project, making efficiency projects appear in every case to be additive to total expenses.

last revised 8/8/2012