Posts Tagged ‘OBF’
I spent last Wednesday at the California PUC in San Francisco participating in a workshop debating the merits of California’s newly proposed policy for utility on-bill repayment (OBR). (Although being at the workshop necessitated my taking the Boston redeye that night (ugh) my spirits were lifted as I waited at SFO and watched Duke hoop’s last minute upset at UNC – but I digress…)
My friend Brad Copithorne from the Environmental Defense Fund has been in the midst of developing this new OBR program and he had invited me to join these proceedings. Take a look at some of Brad’s thoughts here.
OBR makes a ton of sense. It’s a better version of the existing utility OBF program currently provided by PG&E, SoCal and SDG&E and several other leading utilities around the country. While last year Groom Energy started talking to folks about how the DOE could spur the market by funding OBF, OBR looks like an even better solution.
With the current OBF model utilities loan capital to customers at low or no interest, funding their energy efficiency projects while gaining repayment through their existing billing relationship. Monthly loan charges show up just as another line item on the customer’s regular invoice. As most projects are fast payback, these three to five year OBF loans are cash flow positive from day one.
But the funding pool supporting OBF loans comes only from ratepayers. As this capital gets allocated during slugfest utility/PUC negotiations (which have a lot more at stake) utilities are not positively biased toward OBF. More fundamentally, as utilities are not chartered banks, lending is already outside their corporate charter.
Using the existing OBF model, CA utilities provided @ $32 million through 1,200 loans during 2011.
But CA policy makers know this amount is noise compared to the famous McKinsey 2008 estimate of $500+ billion needed to fund energy efficiency projects across the US.
So the new CA OBR framework proposes that outside bank/finance companies can enter the market, providing what could be unlimited loan capital for customer projects. These bank/finance companies would fund projects upon their completion and have their loans repaid through the existing utility bill, like in OBF. But here the utility operates just as the loan administrator, forwarding the customer’s monthly debt service payments back to the bank/finance companies (whose core business is making loans.)
While the debate on the details is still taking place (what happens if the utility itself goes bankrupt? are credit enhancements necessary for these loans? do the energy savings need to be guaranteed? etc.) it’s clear this model is already profoundly positive for two reasons:
- People pay their utility bills - even during the current recession utilities experienced less than a 1 percent default rate for their billings, versus @ 5% rate for more traditional small business lending. Which means that although OBR is still new and “unproven”, long-term these types of loans are very bankable (meaning low cost and packageable.)
- Capital comes from professional sources. These folks have a day job of assessing risk and loaning money to willing and bankable customers. And this means that the loan terms can be longer, leading to “deeper” retrofit projects with longer, but still attractive and certain returns. It also accommodates energy savings service contracts like our CESA.
So we’ll cross our fingers that the policy review goes well and California kicks off this new model, even if its not perfect. And like other innovative, new energy related programs coming from the Golden State, we can expect to see it rolling out to other states across the US in the next couple of years.
Whenever a utility offers our customer on-bill financing we know we’ll be installing this energy efficiency project within a few months. Our hit rate for these projects is literally 100%.
The model is so straight forward it’s no surprise customers quickly say yes. No capital budgeting process, no new banking relationship, just an extension to an existing long-standing utility relationship. Whether its a municipal facility or a large corporation both recognize this option as a smart decision. Their monthly bill stays the same or goes down, with energy savings offsetting the interest and principal on the loan. Once paid off in a few years their monthly cost savings goes up even higher.
So why isn’t on-bill financing offered more widely?
Across the country PUC’s are increasingly mandating energy efficiency goals during their rate negotiations with utilities. As part of the PUC’s rate negotiation they know on-bill financing adds another layer of cost, essentially taxing utilities twice – first requiring them to offer energy efficiency rebates and second having them extend loans to their customers.
Although utilities already take credit risk everyday with their customers, they don’t like being a bank. At the end of 2010 we learned that one publicly traded utility was discontinuing their wildly successful on-bill financing program for this exact reason.
Meanwhile the DOE’s Loan Guarantee program’s stated mission is to “accelerate the domestic commercial deployment of innovative and advanced clean energy technologies.” The controversial program seems to have spent $ billions funding cleantech development (ie. manufacturing) more than deployment.
How about accelerating less sexy, but proven energy efficiency deployment?
Offer utilities a loan guarantee which supports on-bill financing.
With a Federal guarantee for loan repayment, utilities in every region would run fast to deliver on-bill financing. The model would help them hit their PUC negotiated energy efficiency goals and, most importantly, reduce customer consumption. Utilities would continue to source and qualify energy projects – but could then leverage their existing monthly billing relationships to off-load this high quality debt to banks and finance companies. These could even be packaged and resold. Can you say CARBs (Cleantech Account Receivables Bonds)?
Where PACE got derailed because Freddie Mac and Fannie Mae wouldn’t support taking a subordinate position on their mortgages, the on-bill financing model requires very few participants to be initiated – the customer and the utility.
In the past few weeks I’ve pushed this idea with a few folks, including the Environmental Defense Fund, a few utilities and on two Cleantech panels, one hosted by the New England Clean Energy Council, and another hosted by Boston’s Kellogg School of Management alumni group.
As I rarely spend cycles trying to influence Federal policy it occured to me that our blog may be a better way to reach folks who can carry this idea a bit further.