California Decision May Catalyze Energy Efficiency Financing

Kat Friedrich

Kat Friedrich, Clean Energy Finance Center

A new market-shaping decision took place at the California Public Utilities Commission  on Sept. 19. To increase the state’s reliance on private capital for energy efficiency financing, the CPUC allocated $65.9 million for a suite of financing pilot programs for the state’s investor-owned utilities. California’s multipronged approach could lead to original solutions that other states might adopt.

“It’s a very aggressive effort,” said Frank Spasaro, manager of energy efficiency partnerships and finance at Southern California Gas Company.

Most of the new programs will be offered by all of the state’s major investor-owned utilities. California also has other large utilities, but they are not part of the CPUC’s decision.

“We put a lot of effort into things that are market-transformative,” said David Nemtzow, principal of Nemtzow & Associates. “You can think of it as a catalyst.”

The new suite of programs will leverage ratepayer funds to access private capital. The programs will approach financing challenges from many angles simultaneously. They will test a variety of financing approaches to discover how to carry them out effectively. Utilities may expand these programs later as they learn from their experiences during the pilot phase.

“This is a pilot to learn, to see how the market reacts in different ways,” said Nemtzow. “Will it lead to cheaper interest rates [or] different terms? Will borrowers be more willing to borrow? These are the things we’re testing.”

It has been somewhat controversial that the on-bill repayment programs will require written consent from buyers of commercial properties when the properties are sold. According to Brad Copithorne, an energy and financial policy specialist at Environmental Defense Fund, this feature may discourage investment because some lenders prefer loans that are automatically transferable.

The new suite of financing programs includes three residential programs and three non-residential programs.

The residential programs include an energy efficiency finance line-item charge, a master-metered multifamily pilot program with on-bill repayment, and a single-family direct loan program.

The non-residential programs include two on-bill repayment programs for businesses and a small-business sector on-bill repayment lease providers program (for equipment leasing).

New Residential Programs

The energy efficiency finance line-item charge program will be offered by Pacific Gas and Electric Company. Participants will repay their loans via line item charges on their utility bills. Private investors will fund the loans.

Even if participants do not pay their bills, California law will protect them from disconnections. According to Spasaro, if homeowners make partial payments, these payments will be applied toward other charges on the bills before they are applied to the energy efficiency loans.

The master-metered multifamily pilot program with on-bill repayment is designed for the affordable housing market. This program will connect private investors with multifamily property owners who are seeking to retrofit their buildings for improved energy efficiency. (A master meter is an electric meter serving multiple households.)

In California, Spasaro said, the affordable housing market is relatively limited, so it has been difficult to develop effective programs for this sector. He said community development financial institutions have been involved in creating this program.

Spasaro said this program may offer free services, rebates, and solar water heating. Credit enhancements are likely to be included. (Credit enhancements provide incentives for lenders to offer improved terms for projects.)

The CPUC decided this program will not require that loan recipients save enough energy to break even financially each year. (This requirement is also known as “bill neutrality.”) Program participants who do not make their loan payments will be protected from disconnections.

The single-family direct loan program is a loan program that will provide private capital for low-to-middle-income homeowners. The program has been expanded to allow both indirect and direct loans. There will be a loan loss reserve to shield lenders in case some loans are not repaid.

New Non-Residential Programs

The two on-bill repayment programs for businesses will draw on private capital from lenders to provide energy efficiency loans. One of the programs is for small businesses while the other program covers the remainder of the sector.

The small-business program targets organizations that are having difficulty obtaining energy efficiency financing.

The medium-to-large-business program will cover various approaches to energy efficiency including distributed generation and demand response. (Demand response programs adjust an organization’s energy use so that it is better matched with the power utilities provide. This can make businesses more energy-efficient.)

In both of these programs, electric service may be disconnected if businesses fail to make loan payments. If businesses make partial payments, these payments will be divided between their energy bills and their loans. These programs will include loan loss reserves as a credit enhancement.

The small business on-bill repayment lease-providers program is an attempt to engage the equipment leasing market, Spasaro said. “We think there’s a very large effort that goes on in the leasing arena.” There will be a competitive request for proposals to seek potential equipment lease providers.

Pre-Existing Programs

The pre-existing on-bill financing programs use funds collected by utilities from ratepayers to support energy efficiency financing. The CPUC’s decision has modified these programs so that they will reduce their focus on lighting. Spasaro said these programs have waiting lists.

The new generation of pilot programs will go a step beyond these programs into the territory of on-bill repayment, seeking private capital to support energy efficiency retrofits.

Data Management

Creating these programs will require California to set up a new middleman – a so-called organizational “hub” for data and financial information sharing. This hub will be called the California Hub for Energy Efficiency Financing (CHEEF) and will be run by the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA).

Spasaro said the CHEEF will be responsible for managing master servicer activities, credit enhancements, and loan performance data.

The CHEEF will stand between the utilities and the financial organizations and handle their transactions and data. Sharing information across these organizations is likely to be very complex. If California adopts an IT system that can handle these transactions, other states may find it a useful model to copy.

This article was originally published by the Clean Energy Finance Center. You can subscribe to our newsletter, the Clean Energy Finance Source, by visiting http://www.cleanenergyfinancecenter.org/news/.

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