On-Bill Financing: Cost-Free Energy Efficiency

By Jocelyn Durkay | Vol . 22, No. 10 / March 2014

NCSL NewsDid you know?

  • On-bill financing helps consumers afford energy efficient technology with no added costs, since energy savings from efficiency improvements are often greater than the cost to finance them.
  • On-bill financing can serve commercial, industrial or residential owners and tenants.
  • South Carolina’s “Help My House” on-bill financing pilot program reduced energy use by 34 percent for program participants, creating an average annual savings of $288 per home after loan payments.

Consumers, businesses and policymakers interested in using technology to improve energy efficiency can face a significant barrier: the upfront costs of investing in new appliances, boilers, HVAC systems, furnaces, insulation, lighting and weatherization. Some states and utilities are offering a solution known as “on-bill financing,” which provides loans or tariffs for these upgrades that are incorporated into charges on utility bills. Many on-bill financing programs are “bill-neutral,” meaning energy efficiency savings on monthly bills must be greater or equal to a customer’s loan payments. Policymakers have encouraged on-bill financing programs in a number of states by establishing revolving loan funds, creating pilot programs or requiring utilities to adopt an on-bill financing program.

The purpose of on-bill financing is to increase the number of efficiency improvements in existing homes and buildings, and to allow access to energy efficiency technology for those who cannot afford the upfront costs—namely, middle and low-income customers, renters, residents of multifamily properties and small businesses. On-bill financing programs can also be arranged to use utility bill repayment history to underwrite loans or tariffs for customers with poorer credit scores.

The structure of on-bill financing programs is dependent on a number of factors, including utility regulatory structure, state consumer lending laws, owner-occupancy rates, housing stock, program goals and the administrating entity. On-bill financing can be treated as a loan to a customer or a tariff on a meter. Tariffs 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, but may be nontransferable. Programs often use capital from revolving loan funds, public benefits funds or grants. Another option, on-bill repayment, allows third parties, such as banks and credit unions, to administer the loans.

While on-bill financing allows a broad range of customers to enjoy the benefits of energy efficiency, it can create challenges for state lawmakers, regulators and utilities. On-bill financing builds on the relationship between utilities and their customers, and with default rates below 2 percent, it tends to be low risk. However, utilities may not comfortable acting as a lender, and may need to redesign their business models to implement these programs. 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.

State Action

Twelve states have introduced legislation to create revolving loan funds for capital, create pilot programs or require utilities to offer on-bill financing. Several states have also employed on-bill financing to meet state requirements for energy efficiency known as Energy Efficiency Resource Standards.

The Green Jobs-Green New York Act of 2009 and the Power NY Act of 2011 established the structure for a statewide on-bill financing program and named the New York State Energy Research and Development Authority as its administrator. Bill-neutral on-bill financing loans range between $3,000 and $25,000, with an interest rate of 3.49 percent and repayment within 15 years. The program offers two tiers of loans: the first tier is bundled for sale to the private market through an on-bill repayment program, while the second tier, which has lower credit score requirements, is financed by utilities.

The Oregon legislature enacted The Energy Efficiency and Sustainable Technology Act in 2009, allowing a state loan program for energy efficiency, renewable energy and energy conservation programs. Programs are funded by federal, state and local funds. One on-bill financing program, administered by Clean Energy Works Oregon, has worked in more than 3,000 homes to save 2.7 million kWh of electricity— enough electricity to power nearly 250 homes for a year. Financing requires no money down and includes rebates and a free energy audit; loans range from $2,000 to $30,000, with an average loan just over $10,000. Another on-bill financing program, MPower Oregon, works with owners and occupants of affordable housing properties.

A South Carolina program, the “Help My House” Rural Energy Savings Program Pilot, has achieved a 34-percent reduction in energy use in the year following improvements. Customers experienced an average annual savings of $288 after on-bill financing loan payments, with loans averaging $7,700 and a 10-year maximum payback. Operated by the Electric Cooperatives of South Carolina and the Central Electric Power Cooperative, the program was designed for demand-side management to avoid new power plant construction, rehabilitate manufactured housing and increase customer satisfaction. The program was funded by a U.S. Department of Agriculture (USDA) grant, after S.B. 1096 authorized utilities to offer on-bill financing to residential customers in 2010.

Federal Action

The U.S. Department of Energy, through American Recovery and Reinvestment Act (ARRA) funds, has invested more than $31 billion in energy projects, including energy efficiency block grants and weatherization programs. The success of the USDA-funded South Carolina on-bill financing pilot program inspired federal legislation for a Rural Energy Savings Program, authorized in The Agricultural Act of 2014. In December 2013, the USDA announced an Energy Efficiency and Conservation Loan program, which will provide $250 million annually in federal loans to support programs operated by rural electric cooperatives and utilities.

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