Pennsylvania Executes one of the First Residential Energy Efficiency Loan Bundling Transactions

After long and diligent work, my own Commonwealth of Pennsylvania announced last week that it had successfully bundled 4,700 residential energy efficiency loans, and obtained $23 million in cash and $8.3 million in deferred payments, for a projected total of $31.3 million.  The press release is available here.

This is a holy grail of sorts.  People have been saying for years that energy efficiency loans should be able to be bundled and sold, a la mortgages and credit card loans. In theory, bundling the loans would allow private capital to invest in pools of energy efficiency loans, as opposed to individual projects, injecting more capital into the market for energy efficiency upgrades and lowering the interest rates.

Although it seemed like a workable idea, few before the Pennsylvania Treasury had accomplished it.  Energy efficiency loans were considered too weird, too complicated, too risky, etc. to be bundled.  Most critically, financial institutions mostly considered energy efficiency loans to be too risky because there was an insufficient amount of data on energy efficiency loan defaults.

In light of these issues, the Pennsylvania transaction still does not really recognize energy efficiency loans as a unique asset class.  By this I mean that the stream of income from the saved energy is not being recognized as part of the transaction.  As far as the investors are concerned, the loans could be for HVAC equipment or Manolo Blahniks, they are all just unsecured consumer loans.  In addition, Treasury still had to put up significant credit enhancements to make the loan pool desirable. 

In addition, the transaction took a long time and had high transaction costs.  A private entity probably would not have had the resources or perservernce needed to cross the finish line.  Future transactions will need to be more standardized, both with in terms of assets and documentation.

Nonetheless, the Pennsylvania transaction and the many lessons its staff learned along the way may be a very important step in accessing greater pools of capital for energy efficiency.   


A New Lease on Life or a Nail in the Coffin? Notice and Comment Period on PACE Opens

Property Assessed Clean Energy (PACE) programs allow local governments to loan money to homeowners to do energy efficiency projects.  The PACE loans are generally repaid as a property tax line item.  PACE programs were initially very popular, and more than 25 states passed PACE-enabling legislation.

As discussed in earlier posts, in the summer of 2010 the Federal Housing Finance Agency put the brakes on PACE programs.  The FHFA issued an advisory that Fannie Mae and Freddie Mac should put more stringent evaluation standards in place for mortgages on properties with PACE assessments.  On February 28, 2011, FHFA issued a directive stating that Fannie Mae and Freddie Mac should continue to refuse to purchase mortgages on properties with PACE loans.

In the wake of the FHFA actions, several law suits were filed, including one in the Northern District of California.  The plaintiffs in the California PACE case alleged that the FHFA acted without following the appropriate administrative procedures, and without doing and Environmental Impact Assessment. 

The District Court issued a preliminary injunction requiring FHFA to proceed with the the necessary administrative steps that FHFA had failed to do prior to issuing its greenlining mandates.  

On January 26, 2012, the FHFA began the  "notice and comment" period for advanced notice of proposed rulemaking on PACE.  Specifically, the FHFA's proposed action is to prevent Fannie Mae and Freddie Mac from buying certain mortgages whether or not the particular mortgage has a PACE assessment associated with it:

FHFA's Proposed Action would direct [Fannie Mae and Freddie Mac] not to purchase any mortgage that is subject to a first-lien PACE obligation or that could become subject to first-lien PACE obligations without the consent of the mortgage holder.

The wording of the proposed rule is interesting.  Not only would it prevent Fannie and Freddie from buying mortgages on properties with PACE loans, but also potentially from buying any mortgages in a community that has a PACE program, whether or not the particular mortgage has a PACE loan associated with it. 

The Advanced Notice of Proposed Rulemaking triggers a 60-day comment period, which opened January 26 and closes March 26.  The ANPR seeks comments about both the environmental and fiscal aspects of PACE.  The ANPR is here.

Energy Efficiency Policy After ARRA--Access to Capital is Not Enough

My loyal readers may have been surprised (or relieved) by my hiatus from publishing.  I was not idle, however.  I led a study on Energy Efficiency Policy in New Jersey and Pennsylvania on behalf of the Department of Energy-funded Greater Philadelphia Innovation Cluster for Energy Efficient Buildings.  I completed the work last week, and it will be released soon. 

I have also been advising New Jersey Governor Chris Christie on developing the 2011 Energy Master Plan for New Jersey.  The draft plan is available here.  The findings of the eight-person work group on clean energy will be made public shortly, and public hearing is being held on October 21 from 9:30-12:30 at the Rutgers Eco-Complex.  Details are available here

My public sector work has given me some new insights into green building and energy efficiency policy, which will be developed in further posts over the next few months. 

Among the most interesting findings is the difficulty in crafting public policy initiatives to break through the “efficiency gap”—the gap between a customer’s actual investments in energy efficiency and those that appear to be in the consumer’s best interest.

Most policy efforts are aimed at eliminating the "first cost" barrier to energy efficiency.  In other words, providing grants or loans to minimize the upfront investment required for energy efficient systems.  

Making these programs work to achieve scale and realize significant energy savings has proven devilishly difficult.    With the influx of ARRA funds, state and local jurisdictions have invested $650 million in loan programs for energy efficiency projects, with loans generally provided to customers at low- or zero- interest rates. 

The author of a May 2010 nationwide study of state, utility and municipal loan programs by the National Renewable Energy Laboratory concluded:

Despite the advantages of state, utility and municipal loan programs, participation to date has been modest, and they appear to be incapable of driving a large scale transition to a clean energy future by themselves.

A study just released in September, 2011 by the ACEEE which reviewed 24 financing programs nationwide concluded that participation rates were generally low across programs, and do not generally track energy savings.  The report concluded:

While several programs have many years of experience and have issued thousands of loans, this market has yet to come to scale. 

So, it is clear that transforming the energy efficiency environment will require more than providing low cost capital from government sources for at least two reasons.  First, because government capital and capital deployment mechanisms are not robust enough to create scale, and second, because the barriers to energy efficiency are not merely financial.  Psychological barriers, cultural barriers, resource barriers and technical barriers also play important roles.  [This report nicely summarizes the various barriers to energy efficiency investment by sector.]

From my research, policymakers must focus on better stimulating private capital deployment and integrating financing with tools to address other barriers to energy efficiency. Understanding consumer motivation, providing resources to address the less concrete barriers to energy efficiency, and partnering with private capital sources to bring financing to scale  should be the goals of energy efficiency policies going forward.

Part 2 of Green Finance--Alternative Financing Mechanisms For Green Projects

Because of the enormous popularity of last week's post on green project finance--Let's Make A Deal--Top 10 Rules Of Green Project Finance--I have decided to do a series on the various aspects of green project finance. 

Today we will discuss alternative financing mechanisms for green projects.  Over the next few weeks, I will do posts on incentives available for green projects, an update on the PACE controversy, and the basics of renewable energy finance.  If you have suggestions for other posts you would like to see as part of this series, feel free to email me. 

Please note, I am not a finance professional, and the goal of these posts is simply to give a high-level overview of potential financing mechanisms.  As with all financial decisions, please consult your financial professional and attorney for advice specific to your project.  And now, without further adieu, a primer on alternative green financing mechanisms.

Basically, there are only a few mechanisms for financing projects.  Self-finance (your bank account); equity finance (someone else's bank account); debt finance (the bank); government finance (Uncle Sam's bank account); and grant finance (your parents' third party bank accounts). 

These basic mechanisms are no different for green projects.  However, there are some interesting variants that have developed for financing green projects of various types. Many of the financing concepts are not mutually exclusive.  To the extent that one of the models, like energy efficient mortgages, is applicable mostly to a specific sector, it can be used as a model for a specific project's financing arrangement with a particular financier. 


For commercial scale (and even residential) green and renewable energy projects, variants on leases have become an interesting project financing model. Essentially, a provider leases the equipment (typically  to the owner of a facility through a long term lease), which reduces the up front costs.

There are a wide variety of leases available, and the decision among which lease is the best solution is largely based on tax and payment considerations.  Most leases radically reduce or eliminate up front costs.  Some leases allow the lessee to take advantage of the tax incentives, renewable energy credits and depreciation on the green equipment, others do not. 

For a great overview of lease variants for renewable energy projects, see here.

Performance Contracting

Performance contracting is essentially a loan from the provider of the green/renewable equipment (known as an Energy Services Company, or ESCO) that is paid for out of the savings or benefits of the green project.  For example, suppose you want to install energy efficient improvements on a facility which will cost $1000 and will save $100 per year.  Typically, the ESCO arranges the financing, and you pay the ESCO through reduced energy bills, sharing the energy cost savings over a predetermined length of time, after which all of the energy savings revert to you.  The ESCO often guarantees the energy savings from the project. This mechanism is used for both energy efficiency and renewable energy projects, and can be used with projects of almost any scale. The DOE has a handbook on performance contracting available here.

Grants In Lieu

 As part of the Stimulus bill, the Department of Treasury made available "1603 grants" which are grants in lieu of tax credits which reimburse up to 30% of the cost of installing certain renewable energy projects. Environmental Leader summarizes the 1603 grant program here:

The grant is 30 percent of the full cost of the intended solar system. Without the grant, system owners could still claim the 30 percent as a tax credit, but some businesses weren’t profitable enough to make use of the full tax credit. This grant now keeps all businesses eligible for the 30 percent incentive, not just those with enough profits (or those with financing partners with enough profits).

The full description of the program is available from the Department of Treasury.

 Energy-Efficient Mortgages And Energy Improvement Mortgages

A form of debt financing, energy efficient mortgages (and their friend, Energy Improvement Mortgages) work on the premise that implementing energy efficiencies on a property will free up cash which can pay down a debt.  The Department of Energy has a great handbook and other resources available here. HUD has qualifications guidelines, approved lenders, etc. available here. has a nice overview here:

Green, or “Energy efficient” mortgages, let you borrow extra money to pay for energy efficient upgrades to your current home or a new or old home that you plan to buy. The result is a more environmentally friendly living space that uses fewer resources for heating and cooling and has dramatically lower utility costs...At this time, Energy Efficient Mortgages aren’t second mortgages. Though they are created separately from your primary mortgage, they are ultimately rolled into your primary mortgage—so you only make only one payment per month.

Technically, energy efficient mortgages:

give borrowers the opportunity to finance cost-effective, energy-saving measures as part of a single mortgage and stretch debt-to-income qualifying ratios on loans thereby allowing borrowers to qualify for a larger loan amount and a better, more energy-efficient home.

And energy improvement mortgages:

are used for existing homes and allow borrowers to include the cost of energy-efficiency improvements in the mortgage without increasing the down payment.

The problem with energy efficient mortgages is that they are pretty small scale. For example, the FHA program only backs EEMs for one to four units.



HUD Announces Energy Efficient Home Loan Pilot Progran

Today HUD announced a pilot program to finance $25 million in home efficiency upgrade loans:

Backed by the Federal Housing Administration (FHA), these new FHA PowerSaver loans will offer homeowners up to $25,000 to make energy-efficient improvements of their choice, including the installation of insulation, duct sealing, doors and windows, HVAC systems, water heaters, solar panels, and geothermal systems.

Under the Pilot Program, HUD, through FHA-approved lenders, will insure loans for homeowners who are seeking to make energy improvements to their homes. 

This pilot loan program is interesting in the wake of the PACE controversy, wherein property tax-based financing of home efficiency improvements were rejected by Fannie Mae and Freddie Mac, among others.  More information on the PACE controversy is available here.

A big issue with the PACE structure was that the PACE loans were superior in priority to the mortgages. Will the FHA Powersaver loans be subordinated to the mortgages on the homes? The guidance does not say.