financing policy webinar with congressman israel and matthew brown - matthew brown
DESCRIPTION
November 19, 2009 - The Alliance hosted a webinar that addressed a range of current financing proposals, including a discussion by Congressman Israel on Property Assessed Clean Energy (PACE) bonds and an overview by Matthew Brown on models of clean energy financing.TRANSCRIPT
ConoverBrown LLC Consulting firm with a specialty in financing for
clean energy & environmental strategy. Domestic and International government, non-
profit and private clients. Published numerous papers on clean energy
finance – including most recent one for SWEEP. Clean energy finance clients include states,
lenders, national and regional associations and advocacy organizations. Working with these clients to set up new financing programs.
The Goal of Many New Financing Programs is to: Move beyond the small scale pilot to large scale
implementation of efficiency. Make the programs simple to use, with a low
hassle factor. Remove the first-cost barrier to energy
efficiency. Balance credit management with amortization
period: longer loan terms = smaller monthly payments.
Attract low cost capital to finance the program.
How much do most people really care their energy bill?
(Unless you’re a big industrial company, not that much, really)
Considerations for Successful Financing
Simplicity Appropriate to the Need Different market and submarkets need
different levels of complexity. For example:• Mortgage loans require much greater due
diligence than a small $5,000 loan or credit card. • Small business needs for energy retrofits differ
greatly from residential energy retrofits or emergency appliance replacements.
Considerations for Successful Financing Remember the financing alternatives
Home equity line of credit • Typically variable rate product.• Assumes that one has equity in the home.• More difficult to access now than 2+ years ago.
Consumer credit• Typical of a Home Depot/Loews credit card.• Often with a discounted teaser rate that increases dramatically.
SBA 7(a) loans: • May often be for larger amounts than typical business retrofits. • Personal guarantee required of the business owner.
Outline
What we’re financing How we’re financing it
The What:
What will we finance?
Typical Projects Homes
• Home energy renovation based on an audit, insulation/duct sealing, HVAC. Larger project might incorporate solar.
Small Business• Lighting retrofit, HVAC. In some custom cases,
could include small manufacturing with motor or process improvement with new equipment.
How are programs marketed? Most programs are marketed through
networks of contractors. HVAC Electrical “Home Performance” and energy auditors
As a rule (with exceptions) programs marketed by lenders, through government agencies or by utilities have not reached big market share.
Role of Contractors in Financing
For unsecured loans Contractors receive education on the financing
program that they can offer. • Typically give customer a loan application, may do
loan application over the web or through a 1-800 number.
• Customer and contractor know very quickly whether loan is pre-approved.
Secured loans require a longer underwriting analysis and are tied to larger projects.
Typical Value of Retrofits
Homes On very low end, from $2,000-$5,000 On high end, $30,000 if combined with solar
or other major retrofit Average project is around $5,000
• Too large for the average cash purchase or a credit card. Too small for a 2nd Mortgage.
Typical Value of Retrofits
Small Business Variable, with most projects in the range of
$8,000-$12,000. Lighting and some HVAC is typical.
Small manufacturing improvements are custom projects and can run substantially more, or up to $100,000 or more.
The How
What are some potential financing structures?
Customer Contacts Contractor and Arranges for Work Performance
Customer Fills Out Loan Application Provided by Contractor
Lender Processes Loan App
Lender Rejects App
Loan Approved
Contractor Completes Work and Subject to Approval by Customer/Utility, Is Approved for Payment
Lender Pays Contractor
Utility Places Principal & Interest Charge on Utility Bill
Utility Pays Lender Upon Receipt
3rd Party Escrows Loss Reserve
In Case of Default, 3rd Party Pays Lender According to Loss Reserve Terms
A Conceptual Model Under Discussion
Lender Bills Borrower for Principal & Interest
Customer Pays Lender
Customer Contacts Contractor and Arranges for Work Performance
Customer Fills Out Loan Application Provided by Contractor
Lender Processes Loan App
Lender Rejects App
Loan Approved
Contractor Completes Work and Subject to Approval by Customer/Utility, Is Approved for Payment
Lender Pays Contractor
Utility Places Principal & Interest Charge on Utility Bill
Utility Pays Lender Upon Receipt
3rd Party Escrows Loss Reserve
In Case of Default, 3rd Party Pays Lender According to Loss Reserve Terms
A Conceptual Model Under Discussion:
2ndary Market
Lender Bills Borrower for Principal & Interest
Customer Pays Lender
Lender sells loan to secondary market investor Loan Servicer
Bills Customer Customer Pays Servicer
In Case of Default, 3rd Party Pays Investor According to Loss Reserve Terms
Typical Loan Terms
Terms run from 2-10 years for most programs and up to 20 for some, depending on: Small business loans may be shorter than
consumer loans. 24-48 months. Residential may be 48-60 months. Smaller value loans tend to be shorter term. Loans that incorporate solar or more
expensive equipment tend to be longer term.
Influence of Loan Term on Payments
Hypothetical Project Annual Energy Savings: 42,301 kWh Annual Energy Cost Savings: $6,927 Monthly Energy Cost Savings: $577
16 Month Term 24 month Term 36 Month Term Project Cost (net of $7,800 rebate)
$8,835 $8,835 $8,835
Monthly 0% Loan Payment $552 $368 $245 Net Savings (Between Energy Cost Savings and Monthly Principal & Interest)
$25 $209 $332
Source: United Illuminating Company, 2008.
Examples of Loan Term
PA program: up to 10 years. Typical loan is 48 months.
Boulder, CO program is up to 20 years, but is built on a first mortgage lien.
United Illuminating (CT) (Small business program) typical loans are two years but can extend to longer period.
Security and Collateral
Program structures vary. Unsecured loans common in residential
sector for for loans up to $12,500.• Pennsylvania and Colorado use this approach.
Secured loans are more common above this level.
• Most common security is a lien on the house. • Property Assessed Clean Energy Model
Security and Collateral
In many cases, secured loans are not compatible with the market. The market for most loans is a quick-decision
type of market, requiring fast credit analysis or the sale is lost to a less efficient product.
Interest Rates Interest rate
Ranges from 0% to 8.99% for unsecured loans. (CT to PA)
Extremely low interest rates (0-4%) are not necessary in most cases:
• Some of the highest participation programs (Manitoba Hydro, Keystone HELP) are not the lowest rate programs.
• Interest rates and low-as-possible monthly payments are likely most important for residential or small business audit-based energy retrofits.
Loan Servicing
Lender-serviced loans Pennsylvania -- AFC First services loans.
Fannie-Mae serviced loans Fannie-certified loan servicer services loans
under lender-branded name. (WECC/EFS model)
Utility-serviced loans In on-bill financing programs (CT, KS). Most common where utility provides capital.
Origination and Underwriting
Those with capital at risk perform underwriting.
Utility models and Lenders models Utility model – may not look at FICO score,
but looks at internal review. Bill payment, years in business/at same location.
Lender model – relies on FICO score more heavily. 640 and above is typical. Sometimes 700 and up.
Credit and default rates
Credit Enhancements
Loss Reserves are among the most common types of credit enhancements Pennsylvania Keystone HELP program has a 5%
loss reserve ($1,000,000 on $20,000,000) Colorado program, now under bid, has similar loss
reserve set up. Illinois offers a 100% loss provisions. DOE is examining potential for loan
guarantees.
Companion Bill Example
Pennsylvania Keystone HELP
Pennsylvania: 3rd Party Lender Among most successful ee financing: simple and
effective with an innovative capital source. Keystone HELP offers unsecured personal loans at
rates ranging from 4.99%-6.99%. 4.99% for whole-house, audited measures. 5.99% for advanced measures. 6.99% for straight-up ENERGY STAR® measures
Administered by a 3rd party lender that specializes in energy lending.
Delivered through a certified contractor network& 1-800 number.
Pennsylvania: 3rd Party Lender Typical loans are from $5,000-$7,000
over a 4-5 year term. Capitalized with $20 million + from State
Treasurer. Distribution of ~3,500 installations:
Whole-House 10%
Windows/Insulation 30%
HVAC 60%
Manitoba Hydro: On-Bill Loan Most successful loan program in the country with
$200 million through 50,000 loans. Residential sector only.
4.9% rate for all loans is subsidized by utility (non-subsidized rate would be 5.9%). Maximum loan size is $7,500.
Covers insulation, lighting HVAC, windows, doors + others.
Program administered by uitility. But delivered through a strong network of
contractors.
Manitoba Hydro: On-Bill Loan Most successful loan program in the country with $200
million through 50,000 loans. Residential sector only. 4.9% rate for all loans is subsidized by utility (non-
subsidized rate would be 5.9%). Maximum loan size is $7,500.
Covers insulation, lighting HVAC, windows, doors + others.
Program administered by uitility. But delivered through a strong network of contractors. The program uses a streamlined application process.
Borrowers know within minutes if they are approved.
Connecticut: On-bill loan United Illuminating (UI) program is one of the
most successful on bill loan programs in the small commercial sector. Has reached nearly 1/3 of eligible customer base.
UI offers a 0% loan that is paired with rebates. UI-certified contractors conduct an audit and
provide results to the utility. Customer/borrowers apply for loans and are screened for credit worthiness.
Default rates on loans have been less than 1%.
Connecticut: On-bill loan UI is now bumping up against its $4.5 million program
maximum and has asked the utility commission to increase loan maximum to $7 million.
Lighting upgrades and refrigeration make up the majority of the installations. Typical loans are $8-12,000.
The combination of rebates and on bill loan always give the customer a net positive cash flow from day one.
Relationship with contractors has been absolutely critical to program success.