The Alliance to Save Energy’s Commission on National Energy Policy included financing as one of the central recommendations in its recent report, "Energy 2030: Doubling U.S. Energy Productivity by 2030."
The commission consists of some of the key leaders in energy policy and business in the United States. The commission's plan would use financing programs and policies to unleash hundreds of billions of dollars of capital to support trillions of dollars of potential energy savings.
According to the commission, energy savings performance contracts and utility energy service contracts, which focus on government-owned buildings, are the main energy efficiency financing methods which are active in the market. Although these models work well, their scope is not broad enough to have a broad nationwide impact on energy efficiency.
To open the door to new energy efficiency financing opportunities, the commission recommends:
- creating a secondary market for efficiency loans
- setting up state and local programs to resell loans to investors in secondary markets
- initiating on-bill repayment and on-bill financing programs
- improving federal regulations to support financing efficiency through property taxes and trusts
- attaching energy efficiency incentives to mortgages
- setting up tax policies that encourage industrial investment in efficiency
- increasing real estate buyers' awareness through ratings and information
- providing customers with their energy use data
Creating a Secondary Market
There is no robust secondary market for energy efficiency loans because there is no uniform system for evaluating these loans. In secondary markets, investors buy loans which have already been issued. If institutional investors could buy large quantities of energy efficiency loans, that would create a market for energy efficiency lending.
To remove this barrier and allow investors access to the market, the commission recommends that consistent underwriting guidelines, contract language, and data requirements for energy efficiency investment be developed.
The report also recommends that state and local governments set up programs to resell groups of loans to investors in secondary markets. These programs would be similar to the new Warehouse for Energy Efficiency Loans (WHEEL) program.
Revising Policies and Initiating Programs
New state and local programs could use on-bill repayment or property taxes to fund energy efficiency. On-bill repayment programs provide customers with the opportunity to pay for energy efficiency improvements over time through their utility bills. Third-party lenders pay for the upfront costs. On-bill financing programs are similar to on-bill repayment programs, but are financed by utility or ratepayer capital.
Revising federal regulations could make it easier for energy efficiency financing to develop. For example, real estate investment trusts are one potential vehicle for efficiency.
Improving federal regulations related to residential property assessed clean energy (PACE) would remove the current roadblocks that obstruct these programs. Federal constraints do not exist for commercial PACE.
Federal regulations could also build energy efficiency incentives into mortgage programs. If mortgage programs included incentives for energy efficiency, that would steer the housing market toward more efficient choices. It would also encourage people to retrofit their homes before selling them.
Changing federal tax policies could encourage industries to engage in capital investments which might also support energy efficiency. These policies could also target specific energy efficiency measures.
Making Efficiency Information Visible
The commission recommends increasing awareness of energy efficiency on a national level. Making energy data transparent, available and easy to understand is one step toward improving public understanding of energy use. It is also important for financial markets, which need high-quality data on the actual energy savings associated with various types of energy efficiency projects.
Energy efficiency rating systems for buildings can give real estate buyers and sellers a visual incentive to pay attention to energy use. Manufacturers can also use ratings for appliances and other products.
Allowing utility customers and third parties access to standardized energy data can empower customers to track their energy savings. For this approach to succeed, state regulators would need to set up rules to ensure customer privacy.
Marketing is an essential ingredient for the success of energy efficiency finance. But too often, finance and efficiency experts focus on technical and financial issues and underestimate the importance of marketing. Using best practices in marketing is necessary to drive demand to the high levels state goals require.
You may email the authors of any of the Clean Energy Finance Forum's articles via our contact form.