Energy Efficiency Finance 301: The Growing Popularity of On-Bill Financing

The promise of energy efficiency investments to boost the overall economy and to create and sustain jobs is becoming more widely accepted, as shown in part by the ever-growing number of cost-effective energy efficiency financing programs across the country. Such programs reduce first-cost barriers for energy efficiency improvements that decrease energy consumption, enhance building comfort, and reduce utility bills. A promising and growing trend in program design for energy efficiency finance is on-bill financing. This financial mechanism is in many ways uniquely positioned to reduce first-cost barriers in several building markets, some of which have traditionally been underserved by energy efficiency finance.

Over the past several months, ACEEE has released a series of reports on energy efficiency finance, beginning with Energy Efficiency Finance 101: Understanding the Marketplace (and its accompanying blog post), which gives an overview of the financing options and investment partners that are currently available. What Have We Learned from Energy Efficiency Financing Programs? (and its blog post) offers a review of 24 energy efficiency loan programs and further explores the potential of these low-risk investments. The latest installment, On-Bill Financing for Energy Efficiency Improvements: A Review of Current Program Challenges, Opportunities, and Best Practices, takes an up-close look at 19 existing on-bill programs, ascertains the key elements that make them successful (as well as factors that may impede the achievement of optimal results), and identifies emerging trends in program implementation.

On-bill financing is a means for utilities and their financial partners to extend upfront capital for energy efficiency improvements that can be repaid on a customer’s utility bill. In many cases, the customer’s utility bills will go down because the energy savings exceed 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.

Financing can be extended to previously underserved markets, such as rental and multifamily buildings, by being structured as a service charge, or tariff, that follows the meter. There is also potential for traditionally credit-constrained customers to gain access to financing through modified underwriting that takes bill payment history into account. Furthermore, on-bill financing has the power to attract capital from previously untapped sources because customers tend to prioritize their utility bill payments and this is viewed by some investors as a form of security.

No two on-bill programs are exactly alike. This fact can be attributed to the diversity of utility and regulatory structures, the specific needs of different communities, and the differing state and regional legal and regulatory landscapes. Fortunately, we appear to be entering an era of experimentation, as the number of on-bill programs is growing, providing many opportunities to learn from experience. Beyond the shared characteristic of on-bill repayment, these programs vary in their sources of capital, financing product design, target market, and overall implementation strategy.

One major trend associated with on-bill finance is increased engagement of private banks and financial institutions. For many programs, private financial institutions play an invaluable role as partners by providing capital, and in some cases they assist with program administration and underwriting. Just this month, the California Public Utility Commission proposed a statewide on-bill program that would incorporate the use of third-party capital and effectively shift some legal and administrative burden away from the utilities. The program is a significant opportunity to expand on-bill offerings to residential customers throughout the state.

While the majority of the programs we examined still relied on a federal funding source (grants or loans) and/or ratepayer funds for capital, the private sector is likely to be critical to the sustainability, growth, and scaling of these programs in the future, especially given ongoing pressure for fiscal austerity. On-bill financing, with default rates typically lower then 2%, potentially offers a unique opportunity for financial institutions to safely tap into traditionally underserved markets by leveraging the utility’s relationship with the customer to provide safe, cost-effective investments with steady returns.

On-bill financing is an innovative and versatile tool with a lot of potential for scalability. As the number of programs grows, we are beginning to see many of them start to experiment with private sector engagement and program scaling. Important next steps include collecting performance data for the financing products to look at their potential in the secondary market and identifying replicable elements of successful program design.

For more information, download the report. Over the next few weeks, we will be also adding a piece on on-bill financing to our State Technical Assistance Toolkit.