Financing Avenues: Loans and Tariffs
On-bill financing can be utilized for commercial, industrial or residential owners and tenants; residential programs can be structured to single-family or multifamily housing. Programs may serve a single or multiple markets. To get started, on-bill financing programs use capital from revolving loan funds, public benefits funds, utility shareholder funds, grants or private investors. Some programs use the customer loan model—where the loan is tied to the property owner—while others utilize a tariff model—where the loan is tied to the meter. Tariffs may not require a utility to significantly alter its business model, but do require the utility to process on-bill payments until the full cost of the financing is repaid. Tariffs may not create a lien and are ideal for rental properties, as the debt—and benefits of the upgrade—stay with a property when a tenant moves. Loans function best for owners that can take on additional debt, but may be non-transferable if the property is sold. Another form of financing, a service agreement, blends the loan and tariffs models and has been used in multifamily housing programs, such as when a landlord pays utility bills on a multifamily housing unit.
On-bill financing can bring the benefits of energy efficiency, and renewable energy, to a broader range of utility customers by eliminating or significantly reducing upfront costs for efficiency improvements. Customers’ savings from increased efficiency often exceed loan payments, so customers see immedieate benefits. On-bill financing builds on the relationship between utilities and their customers and programs can provide security to utilities and lenders by allowing a utility to disconnect power if the customer defaults on the loan. Utilities can bundle financing with other efficiency incentives, such as rebates or tax credits. With default rates below three percent, on-bill financing is relatively low risk relative to other loan default rates. On-bill financing is possible for gas or electric companies, although financing programs for multiple fuel sources becomes more complex. Increased efficiency can help keep all customers’ rates lower and avoid costs of new power plant construction. Programs can increase their impact by bundling on-bill financing with marketing, technical assistance through energy audits, cost sharing tools like rebates, use of prescreened contractors for services and post-installation inspections for quality assurance. On-bill financing programs can also assist states with meeting Energy Efficiency Resource Standards.
While on-bill financing can generate benefits for customers, this policy tool creates several challenges for state lawmakers, regulators and utilities. Private lenders may perceive on-bill financing to be of higher risk and be unfamiliar with energy efficiency lending, whereas utilities may not comfortable with the idea of acting as a lender, and may need to redesign their business model and billing systems to implement the administrative components of programs. Additionally, utilities may not have the means or the desire to become lending institutions. Additionally, property owners may not want to accrue more debt.
On-bill loans require adherence to state consumer-lending laws, while on-bill tariffs may require regulatory approval. Education and outreach are also important to a program’s success. Using disconnection of service by utilities as a method of security payment may raise consumer protection issues. On-bill financing is only one method for promoting energy efficiency and other state or utility initiatives—regardless of whether they involve financing—may be more effective in achieving efficiency goals or targets.
On-bill repayment is another emerging finance tool. While on-bill financing refers to programs that utilize ratepayer, utility shareholder or public funds, on-bill repayment programs leverage private, third-party capital for financing. Banks, credit unions or financial institutions provide the loan capital and loan payments are displayed on utility bills. This approach allows third-party institutions to take care of administrative functions, while utilities only need to process payments. On-bill repayment obligations can utilize several different financing vehicles, including loans, leases and power purchase agreements (or PPAs, which serve as agreements to buy and sell energy savings over time). On-bill repayment can also be sole sourced or open sourced—programs in New York and Oregon use a single source of capital while Hawaii is currently developing an open source model where banks and investors compete for customers. On-bill repayment has been implemented in Alabama, Georgia, Illinois, Kentucky, Michigan, Mississippi, New York, North Carolina, Oregon, Tennessee and Virginia; on-bill repayment is in development in California, Connecticut, Hawaii and Minnesota.
Twelve states have enacted legislation to authorize public benefit funds for capital, to create pilot programs or to require utilities to offer on-bill financing or on-bill repayment. Legislation intent on creating on-bill financing programs can explore a variety of topics and consider numerous factors. For example, states should examine whether on-bill financing is the best mechanism for achieving a state’s goals, or if a program such as Property Assessed Clean Energy (PACE) Financing would better meet these goals. Additionally, states may select which technologies and energy efficient upgrades are available for financing, or direct the state’s public utility to do so, rather than utilities. If a state implements on-bill repayment, stakeholders must determine whether utilities or third-parties financers assume the risk. Lastly, similar to any policy, on-bill financing programs should be structured to reflect a state’s environment and goals, and may not fit a specific model.
Currently in 2014, 10 states have considered legislation related to on-bill financing.
- Legislation carried over from the 2013 session in Hawaii, New York and Vermont remains pending, although not necessarily active (see “2013 Legislation”).
- California: Assembly Bill 2017 (failed) would have authorized the Public Utilities Commission to require an electrical or gas corporation to develop and implement an on-bill repayment program for energy efficiency, renewable energy, distributed generation, energy storage or demand response improvements for rental properties by allowing for the repayment to be included in the utility bill.
- Kentucky: House Bill 195 (failed) would have required retail electric suppliers to take energy-efficiency measures and implement energy-efficiency programs, such as on-bill financing, that increase energy savings over a period of time.
- Michigan: House Bill 5397 (pending) would enable municipalities to establish residential clean energy programs and offer financing, including on-bill financing, for energy efficiency improvements.
- Minnesota: House File 2375 (failed), House File 2834 (enacted) and Senate File 2049 (failed) would authorize for on-bill repayment to be offered for all electric and gas utility customers for energy conservation improvements and certain renewable energy sources.
- Nebraska: Legislative Bill 978 (failed) would have authorized funding for electric and gas utility on-bill payment programs for energy conservation programs under the Low-Income Home Energy Conservation Act.
- New York: Assembly Bill 8945 (pending) would authorize additional provisions to the state’s on-bill recovery program, including defining a utility’s responsibility and programmatic requirements. Companion bill to Senate Bill 5286 (2013). Assembly Bill 10038 (pending) would create a commercial on-bill financing program in the state.
- Oregon: House Bill 4105 (failed) would have no longer required the Public Purpose Fund Administrator to initiate pilot programs exploring the effectiveness of energy efficiency technologies, including on-billing financing, and would allow the Director of the state Department of Energy to initiate such programs.
- Virginia: House Bill 1001 (pending- carried over to 2015) would require electric utilities to file a plan for implementing an on-bill financing program for residential customers with the State Corporation Commission.
In 2013, eight states considered legislation for on-bill financing. For a complete list of enacted and pending energy efficiency financing legislation from 2013, click here.
- California: Senate Bill 37 (failed) would have authorized the Public Utility Commission to require electric and gas utilities to offer on-bill repayment for renewable energy, distributed generation or demand response initiatives.
- Connecticut: House Bill 5591(failed) would have expanded on-bill financing programs to residential, small commercial and industrial utility customers to finance installations and upgrades of technology relating to energy efficiency, renewable energy and smart meters.
- Hawaii: Senate Bill 1087 (enacted) authorized the use of green infrastructure bonds for energy efficiency projects, including on-bill financing, and required the Public Utilities Commission to investigate an on-bill financing program for clean energy technology, demand response technology, and energy use reduction and demand side management devices. Companion bill is House Bill 856 (failed).
- Illinois: Senate Bill 2350 (enacted) requires certain electric or gas utilities to offer an on-bill financing program to owners of multifamily master-metered residential or mixed-use master-metered buildings. Establishes that certain building owners may not use the program in such a way that repayment of the cost of energy efficiency measures is made on the tenant's utility bills.
- Maine: Senate Paper 246 (failed) would have authorized transmission and distribution utilities and gas utilities to provide grants and loans, including on-bill financing loans, for qualifying fuel switching equipment. Senate Paper 512 (failed) requires the Public Utilities Commission to ensure that all electric ratepayers procure all energy efficiency resources found by the commission to be cost-effective, reliable and achievable; allows the commission to impose any order on transmission and distribution utilities necessary to achieve the energy efficiency savings. The bill would extend existing on-bill financing programs offered by utilities to include energy efficiency measures.
- Maryland: House Bill 1173 (failed) would have authorized the Public Service Commission to establish a Small Commercial Energy Efficiency On-Bill Financing Program and permitted the Commission to require a utility company to participate in the program.
- New York: Senate Bill 5286 (pending- carryover) would amend the Green Jobs – Green New York on-bill energy service company energy efficiency payment program, defining a utility’s responsibility and programmatic requirements.
- Vermont: House Bill 437 (failed) would require the Department of Public Service to study the potential for renewable heating and cooling technologies, accessible to customers through on-bill tariffed financing.