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On-Bill Financing for Energy Efficiency Improvements

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Energy efficiency retrofits in our homes and buildings can achieve large monetary and energy savings across the buildings sector, but face numerous barriers.  High upfront costs continue to be one of the significant barriers to tapping into this savings potential.  Addressing the financial barrier to investments in energy efficiency has been a complex hurdle, which is evident from the number of innovative energy efficiency financing program designs that have emerged over the past several decades. To achieve higher savings from energy efficiency programs for buildings, it is imperative to assist property owners with financing the upfront costs of efficiency improvements.  On-bill financing (OBF) can support this goal by leveraging an electric or natural gas utility’s unique relationship with their energy customers to provide convenient access to funding for energy efficiency investments.  This access to financing can then enable customer participation in other energy efficiency programs.

Credit losses on both consumer and commercial utility bills tend to be far lower than for other obligations. OBF allows utility customers to invest in energy efficiency improvements and repay the funds through additional charges on their utility bills. If structured properly, an OBF program can substantially reduce the cost of and improve access to financing.  In many cases, the product can be “bill-neutral,” meaning that energy savings are sufficient to cover the monthly payments for the financing so that the total monthly charge on utility bills is less than or equal to the pre-investment amount.

On-bill programs have been piloted as early as 1993 (New London Resource Project, Wisconsin), but have recently seen a surge in popularity.  Currently, utilities in at least 23 states have implemented or are about to implement OBF programs, many of which (Illinois, Hawaii, Oregon, California, Kentucky, Georgia, South Carolina, Michigan, and New York) have legislation in place that supports adoption. Additionally, a number of state utility regulators have taken action to explore the feasibility of on-bill programs.

Below are some of the benefits and barriers to on-bill programs.

OBF Benefits:

  • Drastically reduces or eliminates first costs for customers.
  • Aligns timing of costs and benefits of energy efficiency measures, generating immediate positive cash flow—monthly energy savings are equal to or greater than the repayment charge.
  • Leverages existing billing relationship between consumers and utilities.
  • Can operate concurrently with a rebate program to reduce the total amount financed.
  • Financing can be tied to a property (often through the meter) so that debt transfers across owners/tenants.
  • Bill payment history can be used instead of or to complement a full credit report.
  • Implied or actual threat of disconnection increases repayment rates.
  • Versatile financing tool that can be combined with a variety of different sources of capital and implementation strategies.

OBF Barriers:

  • Utilities may not have the human resources to navigate or comply with consumer lending laws, which vary by state.
  • Utilities may not have the expertise, the means, or the desire to become lending institutions.
  • May require a redesign of utilities' billing systems.
  • Equity consideration: some programs are funded by public benefit funds, into which everyone pays, but only a limited number of people apply for and actually benefit from the on-bill financing program.
  • Need for marketing and education—availability of financing doesn’t guarantee participation and many customers may not be familiar with how financing options operate.
  • Financing projects that generate savings for multiple fuels can be tricky—e.g., should electric customers help pay for natural gas or oil savings?