On-Bill Financing Report Shows Strong Performance

On-bill financing can be a powerful tool for offering attractive energy efficiency options to a broad range of utility customers, according to a new report by State and Local Energy Efficiency Action Network (SEE Action).

Utility customers often fail to invest in energy efficiency because of its upfront costs, the report said. On-bill financing allows customers to pay for energy efficiency measures gradually over time through charges included on their utility bills. This approach makes it much easier for some customers to access energy efficiency financing.

The report, “Financing Energy Improvements on Utility Bills: Market Updates and Key Program Design Considerations for Policymakers and Administrators,” breaks down existing on-bill financing programs into categories and evaluates their performance.

On-bill financing “appears to add a really powerful tool to the quiver of arrows that policymakers and administrators can bring to bear,” said report coauthor Mark Zimring, program manager at Lawrence Berkeley National Laboratory.

“The findings are fascinating,” Zimring said. “We were quite surprised at the overall volume of activity and the strong performance.”

According to the report, the 30 programs included in this study delivered over $1.8 billion in financing.

Rock-Bottom Default Rates

One of the outstanding findings of the report is that default rates for these programs are much lower than those for most consumer debt. The on-bill financing programs featured in the report all have default rates less than or equal to 3 percent.

Yuri Yakubov, senior program manager at Pacific Gas and Electric (PG&E), said during a SEE Action webinar on June 11 that an on-bill financing program at PG&E issued approximately 704 loans before seeing any defaults take place.

These startlingly low default rates have the potential to build high investor trust in on-bill financing. This could help energy efficiency programs grow and expand access to private capital.

“Some financial institutions and investors may be reluctant to trust this data without 10, 20 or 30 years of data across these programs,” Zimring said. “We are still very much in a learning-lessons-from-experience phase.”

Expanded Credit Opportunities

Interestingly, it appears that default rates do not vary significantly based on customer credit score criteria. Expanding the range of eligible credit scores somewhat and using utility bill payment history as a qualifying factor did not affect default rates adversely among these programs.

On-bill financing programs can use a few different methods to determine whether customers are eligible to participate. Their criteria can be based on credit scores, utility bill payment records, or other indicators of financial stability.

For example, Manitoba Hydro’s Power Smart Residential Loan program takes each customer's employment, credit, bankruptcy history, bill payment history, and debt-to-income ratio into account, marketing specialist Becky Radtke said during the SEE Action webinar. This program’s default rate is only 0.48 percent.

Underserved Communities

Some on-bill financing programs have been launched with the intent of reaching out to underserved markets such as middle-income homeowners and small businesses, the report said.

Loan application rejection rates are in the 30-40 percent range when using traditional financing criteria, Zimring said. But expanding customer creditworthiness criteria has worked well in existing on-bill financing programs. This can enable programs to responsibly expand access to capital to customers who might not qualify for financing using traditional underwriting standards to reap the benefits of energy efficiency.

“Because the performance has been so strong, we are seeing hybrid criteria or alternative criteria,” Zimring said. “A number of programs have been able to bring down the application decline rate quite substantially to between zero and 25 percent. They appear to have been able to do that at manageable risk. That risk is reflected in the overall default and loss rates that we capture in the report.”

Expanding customer creditworthiness criteria can help open access to capital for underserved communities or in locations where high credit scores may be less common than elsewhere.

“If your priority is on serving underserved consumers vs serving Class A sophisticated investment-grade commercial facilities, you might choose a different source of capital or program structure,” Zimring said. “There are multiple pathways to scale. All of these program designs might be appropriate.”

Gradual Uptake

Customer response to these on-bill financing programs tends to be minimal at first, with participation rates hovering under one percent annually for 10 of 17 of the residential on-bill programs in this study.

But Zimring said this may be due to programs being new to utility customers. The programs with the highest uptake are the ones that have been on the market for over five years. Several programs with many years of experience have achieved uptake rates of up to 30 percent.

“Like other efficiency programs, financing programs take some time to ramp up,” Zimring said. “70 percent of residential on-bill programs have launched in the past five years. Like other initiatives, their annual market penetration might be expected to increase through time as the programs mature.”

Growing Markets

“If policymaker goals are to drive deep comprehensive energy savings, then it’s not clear that financing alone is going to drive, at scale, increased leverage,” Zimring said. “It’s likely going to take a broad set of programmatic approaches to drive markets to scale.”

Technical assistance, rebates, and contractor training are also necessary to drive markets to scale, Zimring said.

Radtke said contractor participation and awareness have been central building blocks of Manitoba Hydro’s success with on-bill financing. “Our financing programs are very contractor-driven,” she said. “We try to get back to contractors within 48 hours. We also have a very strong contractor network.”

High levels of uptake also seem to depend on program design choices, Zimring said. “Those programs that have achieved relatively deep market penetration appear to let participants finance single measures – or if they’re pursuing multi-measure energy improvements, they’ve coupled financing with a broader set of incentives. Those incentives typically include relatively robust rebates covering a quarter to half of the project costs.”

Large-Scale Capital

On-bill financing can be one route for energy efficiency programs to access large volumes of capital, which helps to bring the industry to scale.

“A number of programs have very successfully tapped into large pools of private capital, typically providing very large credit enhancements,” Zimring said. “For example, Tennessee Valley Authority provides a full guarantee against losses to its financing partner. It’s running a program at no cost to itself.”

Organizations seeking to create programs like this one can adopt one of two routes to absorbing risk, Zimring said. Either private markets can take on the risk or else the program developers can choose to absorb it.

Customized Design

Zimring emphasized that the authors of the report are not seeking to recommend just one type of program. On-bill financing approaches should be customized to fit program goals.

“Policymakers face design choices,” Zimring said. “You’re balancing multiple objectives. Programmatic choices really matter to participation rates.”

It’s essential for program success for policymakers to understand the range of on-bill financing options available to them, Zimring said. And a large portion of the report is dedicated to helping decision makers do that. The report expands on the many design options that exist for on-bill financing programs.

“Legislation and regulatory action can really lock in program design features,” Zimring said. “These programs require really thoughtful design and small program design elements can matter a lot.” For more information, download the Blueprint for Efficiency webinar on this report from iTunes.

Disclaimer: Clean Energy Finance Forum team members also participate in Yale University's Blueprint for Efficiency webinar series.

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