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State and Local Climate and Energy Program

Financing Program Decision Tool

house-solar icon.This tool is for state and local governments interested in developing a financing program to support energy efficiency and clean energy improvements for large numbers of buildings within their jurisdiction. For those who have not already visited the Clean Energy Financing Programs home page, the information there may be helpful in understanding and answering the questions below. For clarification on individual questions, use the “Help?” links. In order to use the tool, please follow the steps outlined below:

Step 1 - Answer the nine QUESTIONS below about the Target Market and Available Resources for your program.

Step 2 - Review the RESULTS section on the right, which displays the Finance Program Options that are most applicable.

Step 3 - Click on a highlighted program option to learn more about that option.

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Financing Program Decision Tool (XLS) (583K, About XLSExit EPA disclaimer)

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Questions

Target Market

1) Which sector will the program target?

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2) Will the program target borrowers with marginal credit?

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3) Will the program offer subsidized financing?

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4) Will the target market include tenant-occupied buildings?

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Available Resources

5) Do you have access to funds that will not need to be repaid?

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6) Can you take on additional debt?

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7) Can you issue bonds to support this particular program?

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8) Has your state passed PACE legislation?

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9) Is on-bill repayment though local utilities a viable option?

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Revolving Loans

Revolving loan funds (RLFs) use a source of capital (typically offered by a state or local government) to make direct loans to borrowers for energy efficiency and renewable energy projects. As these loans are repaid, the proceeds flow back into the fund and become available for more loans.

Revolving loan funds can be managed internally by government agencies or by a third-party financial institution that uses the loan capital offered by the agencies to make loans on their behalf. In either case, the capital provider has the ability to set the loan terms and conditions.

Revolving Loan Fund Characteristics

Technology Focus Energy Efficiency and Renewable Energy
Type of Measures Financed Individual Product Installations or Whole-Building Upgrades
Target Sector(s) Commercial & Industrial, Residential, Public, and Non-Profit
Compatible Funding Sources Private Lenders, Bonds, or Public Funds
Security Required of Borrower Unsecured for Smaller Loans (under $7,500 to $20,000), Property Lien for Larger Loans
Repayment Mechanism Monthly Loan Payment Directly to Government Lender or to Third-Party Program Administrator
Complexity to Implement Moderate
Role for State/Local Governments Make Loans, Collect Monthly Loan Payments, or contract with Third-Party Program Administrator
Impact per Dollar of Public Funds Moderate

Please refer to the "Revoling Loans" section of the Financing Programs Resource Guide (57 pp, 481K, About PDF) for additional information regarding:

  • Considerations for State and Local Governments
  • When to Use Revolving Loan Funds
  • Example Programs/Case Studies
  • Resources & Guidance

Credit-Enhanced Private Loans

In a credit-enhanced loan, a third party assumes some of the loan risk that would originally have been born by the lender. Credit-enhanced private lending is a public-private partnership whereby government funds encourage private lenders to offer attractive loans to select markets.

The third-party loans are funded, originated, and serviced by a financial institution (i.e., a bank or a credit union) and are typically similar to standard loan products, but with better terms, such as lower interest rates or more flexible underwriting standards. The government funds are not used to make the actual loans, but serve to mitigate the financial institution's risk or to subsidize lower interest rates to the borrower.

Credit-Enhanced Private Loan Characteristics

Technology Focus Energy Efficiency and Renewable Energy
Type of Measures Financed Individual Product Installations or Whole-Building Upgrades
Target Sector(s) Commercial & Industrial, Residential, and Non-Profit
Compatible Funding Sources Public Funds (for the Credit Enhancements) and Private Lenders (Loan Capital)
Security Required of Borrower Unsecured for Smaller Loans (under $7,500 to $20,000), Junior or Senior Property Lien for Larger Loans
Repayment Mechanism Monthly Loan Payment to Bank or Credit Union
Complexity to Implement Complex
Role for State/Local Governments Partner with Financial Institution(s), Deposit Credit Enhancement Funds in Escrow, Make Periodic Payments to Financial Institution from Escrow Account
Impact per Dollar of Public Funds High

Please refer to the "Credit-Enhanced Private Loans" section of the Financing Programs Resource Guide (57 pp, 481K, About PDF) for additional information regarding:

  • Considerations for State and Local Governments
  • When to Use Credit-Enhanced Private Loans
  • Example Programs/Case Studies
  • Resources & Guidance

Property Assessed Clean Energy (PACE)

Property Assessed Clean Energy (PACE) builds on the familiar concept of a municipal improvement district. PACE creates a voluntary special tax or special assessment district that funds the cost of energy improvements for commercial and industrial property owners that voluntarily join the district. The owner pays the district back over time through an assessment on their property taxes. The savings on the owner's utility bills help cover the cost of the assessment. The assessment is secured by a property lien that takes priority over the mortgage and other loans if there is a foreclosure. One advantage of PACE is that the assessment stays with the property in the event of a sale, assuming that the buyer agrees to this transfer. The benefits of the upgrades and the corresponding payments can be transferred to the new owner.

PACE Characteristics

Technology Focus Energy Efficiency and Renewable Energy
Type of Measures Financed Whole-Building Upgrades
Target Sector(s) Commercial & Industrial
Compatible Funding Sources Bonds and/or Public Funds
Security Required of Borrower PACE (Senior) Lien on Building Property
Repayment Mechanism Property Tax Bill
Complexity to Implement Complex
Role for State/Local Governments Pass PACE Legislation, Issue Bonds, Distribute Bond Proceeds to Property Owners, Collect Payments on Property Tax Bills, Pay Bond Holders
Impact per Dollar of Public Funds High to Very High

Please refer to the "Property Assessed Clean Energy " section of the Financing Programs Resource Guide (57 pp, 481K, About PDF) for additional information regarding:

  • Considerations for State and Local Governments
  • When to Use PACE
  • Example Programs/Case Studies
  • Resources & Guidance

On-Bill Repayment

With on-bill repayment (OBR), property owners borrow money for energy improvements and pay it back over time via their utility bills. Early programs were referred to as "on-bill finance", because the utility was expected to finance and originate the loans. Utilities were often uncomfortable in this role. Recent programs are more flexible and allow for the loan capital and origination to be provided by a third-party lender, with the utility bill simply serving as the repayment vehicle.

There are two types of OBR programs: tariffs and loans. Loans are personal debt and must be paid off if the property is sold. Tariffs are an obligation assigned to the utility meter. If the property is sold, the new owner assumes responsibility for the payments.

OBR is unique in its ability to address the "split incentives" problem that occurs when a tenant pays the utility bills. Property owners have little incentive to pay for energy improvements if the tenant reaps the savings, and tenants have little incentive to invest in improvements to a building they do not own. With OBR, the savings and loan payments are on the same bill, thereby eliminating the split-incentives issue.

On-Bill Repayment Characteristics

Technology Focus Energy Efficiency
Type of Measures Financed Individual Product Installations or Whole-Building Upgrades
Target Sector(s) Commercial & Industrial, Residential, Public, and Non-Profit
Compatible Funding Sources Private Lenders, Bonds, or Public Fundss
Security Required of Borrower The Ability to Shut Off Utility Service in the Event of Non-Payment is Typically All the Security Required; Some Programs Require a UCC Filing
Repayment Mechanism Utility Bill
Complexity to Implement Complex
Role for State/Local Governments Partner with Utility, Provide Loan Capital and/or Credit Enhancement Funds to Utility
Impact per Dollar of Public Funds Moderate to High

Please refer to the "On-Bill Repayment" section of the Financing Programs Resource Guide (57 pp, 481K, About PDF) for additional information regarding:

  • Considerations for State and Local Governments
  • When to Use On-Bill Repayment
  • Example Programs/Case Studies
  • Resources & Guidance

Energy Efficient Mortgages

Energy efficient mortgages (EEMs) include the cost of energy efficiency and renewable energy improvements in a single primary mortgage during the purchase or refinance of residential real estate. There are two kinds of energy efficient mortgages:

Conventional Energy Efficient Mortgages – These standard loan products offered by Fannie Mae, Freddie Mac, FHA, and VA follow a well-defined national standard. Although underwritten as a traditional mortgage, an EEM is usually more flexible in areas such as loan-to-value and debt-to-income ratios.

Specialty Mortgages – Specialty mortgages are normally the product of joint collaboration between a lending institution and a local or state government. One or both parties agree to subsidize the mortgage if the borrower makes energy improvements that meet energy efficiency requirements set by the program.

With both kinds of EEMs, third-party funds from public agencies and municipalities can be used to provide incentives to lenders and borrowers in the form of an interest rate buy-down or closing cost credit.

Energy Efficient Mortgage Characteristics

Technology Focus Energy Efficiency and Renewable Energy
Type of Measures Financed Whole-Building Upgrades
Target Sector(s) Residential
Compatible Funding Sources Public Funds
Security Required of Borrower Senior Lien on Home (Must be the Primary Home Mortgage)
Repayment Mechanism Monthly Payment to Bank or Credit Union
Complexity to Implement Moderate
Role for State/Local Governments Partner with Financial Institution(s) to subsidize a specialty EEM
Impact per Dollar of Public Funds High

Please refer to the "Energy Efficient Mortgages" section of the Financing Programs Resource Guide (57 pp, 481K, About PDF) for additional information regarding:

  • Considerations for State and Local Governments
  • When to Use Energy Efficient Mortgages
  • Example Programs/Case Studies
  • Resources & Guidance

Performance Contracting

Energy Savings Performance Contracting (ESPC) is a wide-ranging building retrofit option developed in the private sector. ESPCs are typically performed by an Energy Services Company (ESCO) and include a comprehensive building energy audit, a financial analysis of upgrade options, arrangement of project financing, installation of building upgrades, and post-installation performance monitoring and equipment maintenance.

ESPCs are typically designed to be cash-flow positive or neutral, where the amount of monthly energy savings are at least equal to the amount of the monthly payment needed to finance the improvements. Most ESCOs guarantee the projected energy savings, and will reimburse the customer if the savings are not realized.

ESPCs do not require public subsidies to operate successfully. However, a state or local government can encourage interest in ESPCs by offering rebates or subsidized financing, which may require public-sector funds. Governments with the ability to issue bonds at attractive rates can also aggregate and help raise capital for many smaller projects, passing along the lower interest rate from the large bond issuance to the smaller projects, particularly if the projects will be installed around the same time and have similar payback periods.

Performance Contracting Characteristics

Technology Focus Energy Efficiency and Renewable Energy (Limited)
Type of Measures Financed Whole-Building Upgrades
Target Sector(s) Public, Non-Profit, and Commercial & Industrial
Compatible Funding Sources Private Financing, Public Funds, Bonds
Security Required of Borrower Varies (often a UCC Filing on the financed equipment)
Repayment Mechanism Monthly Loan Payment to ESCO or Financial Institution
Complexity to Implement Simple to Complex
Role for State/Local Governments Public subsidies can enable projects and deep retrofits that might otherwise not be viable
Impact per Dollar of Public Funds High

Please refer to the "Performance Contracting" section of the Financing Programs Resource Guide (57 pp, 481K, About PDF) for additional information regarding:

  • Considerations for State and Local Governments
  • When to Use Performance Contracting
  • Example Programs/Case Studies
  • Resources & Guidance

Rebates

A rebate is a direct transfer of funds with no repayment obligation. It is designed to reduce the overall cost of purchasing an energy efficiency or renewable energy measure or upgrade. Rebates can take the form of price reductions, refunds, or credits. They can be claimed at the point of sale, after verification of installation, or at some future date (like a tax credit or a mail-in rebate).

Rebate Characteristics

Technology Focus Energy Efficiency and Renewable Energy
Type of Measures Financed Single Product or Technology-Focused (Insulation, Boilers, Solar Panels)
Target Sector(s) Commercial & Industrial, Residential, Public, and Non-Profit
Compatible Funding Sources Public Funds
Security Required of Borrower None
Repayment Mechanism None
Complexity to Implement Simple
Role for State/Local Governments Provide Funding, Oversee Distribution of Rebates
Impact per Dollar of Public Funds Low to Moderate

Please refer to the "Rebates" section of the Financing Programs Resource Guide (57 pp, 481K, About PDF) for additional information regarding:

  • Considerations for State and Local Governments
  • When to Use Rebates
  • Example Programs/Case Studies
  • Resources & Guidance

Power Purchase Agreements and Solar Leasing

In a Power Purchase Agreement (PPA), a developer or independent financier pays for and installs renewable energy equipment on the property of an end-user. The property owner then buys the electricity produced by the renewable energy at some pre-determined rate (either fixed or variable) for a set amount of time (typically between 10 and 20 years). Tax credits stay with the developer, and are usually reflected in lower energy prices for the user.

A solar lease is similar to a PPA, but instead of purchasing power, the property owner rents the installed equipment. The combination of the lease payment and the reduced energy bill is typically less than the old bill.

Power Purchase Agreements and Solar Leasing Characteristics

Technology Focus Renewable Energy
Type of Measures Financed Solar, Geothermal, Wind, Biomass, Landfill Gas, etc.
Target Sector(s) Commercial & Industrial, Residential, Public, and Non-Profit
Compatible Funding Sources Private Investors or Lenders (for Developer Capital)
Security Required of Borrower UCC Filing
Repayment Mechanism PPAs –Through Negotiated Price per kWh; Solar Lease – Monthly Payments to Equipment Owner
Complexity to Implement Simple (Solar Leases) to Complex (PPAs)
Role for State/Local Governments If PPAs and solar leasing are not viable, a small public subsidy may be enough to make a difference
Impact per Dollar of Public Funds Moderate to High

Please refer to the "Power Purchase Agreements and Solar Leasing" section of the Financing Programs Resource Guide (57 pp, 481K, About PDF) for additional information regarding:

  • Considerations for State and Local Governments
  • When to Use Power Purchase Agreements and Solar Leasing
  • Example Programs/Case Studies
  • Resources & Guidance

HUD PowerSaver

The U.S. Department of Housing and Urban Development (HUD) PowerSaver loan program provides a federal loan guarantee to encourage banks and credit unions to make loans to finance home energy efficiency and renewable energy improvements up to $25,000. HUD has selected 18 lenders from around the country for a two-year pilot program starting in mid-2011. These lenders may make loans in their HUD-approved target markets, as well as any communities that received U.S. Department of Energy Better Building grants, and also any jurisdictions where EPA's Home Performance with ENERGY STAR program is available. HUD is providing grants to the lenders during the pilot program to help reduce costs for lenders who will pass the savings on to borrowers.

PowerSaver loans under $7,500 may be unsecured, but most of the pilot lenders are focused on larger secured loans. The underwriting guidelines allow a combined loan-to-value ratio of up to 100 percent, a debt-to-income ratio up to 45 percent, and FICO credit scores down to 660. The loan term is up to 15 years for energy efficiency improvements and 20 years for renewable energy projects.

HUD PowerSaver Characteristics

Technology Focus Energy Efficiency and Renewable Energy
Type of Measures Financed Individual Product Installations or Whole-Building Upgrades
Target Sector(s) Residential
Compatible Funding Sources Public Funds
Security Required of Borrower Lien on Property for Loans Over $7,500
Repayment Mechanism Monthly Payment to Bank or Credit Union
Complexity to Implement Low
Role for State/Local Governments Create demand for home energy retrofits with a well-designed audit and installation process
Impact per Dollar of Public Funds Very High

Please refer to the "HUD PowerSaver" section of the Financing Programs Resource Guide (57 pp, 481K, About PDF) for additional information regarding:

  • Considerations for State and Local Governments
  • When to Use HUD PowerSaver
  • Example Programs/Case Studies
  • Resources & Guidance

No Options Available

No financing options are available for the combination of sector selected and responses to Questions 2-9. Please refer to the Financing Programs Resource Guide (57 pp, 481K, About PDF) for additional information regarding:

  • Considerations for State and Local Governments
  • When to Use Power Purchase Agreements and Solar Leasing
  • Example Programs/Case Studies
  • Resources & Guidance


Q1) Which sector will the program target?

Buildings can be grouped by building type and ownership type into four groups: Residential, Commercial & Industrial, Public, and Non-Profit. Each of these sectors is distinct enough to warrant independent program design. Below is a brief description of each:

Residential – Single family homes, duplexes, and townhomes. (Rental and multifamily properties with more than four units are included in the commercial market.)

Commercial & Industrial – Buildings under private ownership used for business, including commercial, small business, multifamily properties, and industrial buildings.

Public – Buildings under public ownership, including government offices, schools, public housing, industrial, and military buildings.

Non-Profit – Large buildings and small businesses owned by non-profit entities.





Q2) Will the program target borrowers with marginal credit?

Many lending programs are created with the express intent of helping those in underserved markets. This includes the segment of the population with credit scores below what would be considered viable for a normal bank or credit union loan. It is important to note that as credit scores decrease, the risk of default and the cost of lending both increase.

Q3) Will the program offer subsidized financing?

Financing is considered "subsidized" when it is offered at a price below what is being charged by private financial institutions, such as a bank or credit union (both of which typically offer the market rate). The difference between the market rate and the subsidized rate offered to borrowers must be paid by a third party — typically the government for publicly-sponsored financing programs. Subsidized financing can take many forms, including lower interest rates for borrowers, loan guarantees, credit enhancements, loan insurance payments, reduced closing costs, etc.

Q4) Will the target market include tenant-occupied buildings?

Split incentives exist in situations where utility bills are paid by a tenant as opposed to the owner of a building. While the property owner typically pays for building improvements, the tenant would reap the benefits of a lower utility bill due to energy savings. On the other hand, tenants have no incentive to invest in capital improvements to a building they do not own. Programs that intend to target tenants and renters require a unique program design.

Q5) Do you have access to funds that will not need to be repaid?

This funding includes any monies that the government has direct control over and that do not need to be repaid (i.e., this money is not the result of a loan or a bond) including, but not limited to, general tax revenues, grants, public benefit funds, system benefit charges, emissions allowance revenues, and violation funds. When answering this question, only consider monies that could conceivably be used to fund an energy efficiency or renewable energy finance program.

Q6) Can you take on additional debt?

Debt is a form of financing in which the borrower receives cash in exchange for a promise to repay the principal amount, plus interest, at some future date. Forms of debt financing for governments include loans and (more commonly) bonds. Issues to consider when answering this question include:

  1. Is taking on additional debt politically feasible?
  2. Is the government near its debt ceiling?
  3. Will voters approve additional debt?
  4. Could debt be issued specifically to support an energy efficiency or renewable energy finance program?


Q7) Can you issue bonds to support this particular program?

Bond issues are a funding option for many programs like PACE or on-bill repayment. Issues to consider when answering this question include:

  1. Would voter approval (and its associated costs and delays) be required?
  2. If voter approval is required, is there a quasi-public authority, such as a housing or economic development authority, that could issue the bonds without a ballot?

Q8) Has your state passed PACE legislation?

To date, PACE-enabling legislation has been passed in the following states: CA, CO, FL, GA, IL, LA, ME, MD, MN, MO, NV, NH, NM, NY, NC, OH, OK, OR, TX, VT, VA, and WI.

Q9) Is on-bill repayment though local utilities a viable option?

With on-bill repayment, the borrower pays for energy improvements over time via their utility bill. In order for on-bill repayment to be implemented, the utility company must be a partner in the finance program. Issues to consider when answering this question include:

  1. Would local or regional utilities be willing to partner to create a finance program?
  2. Do the utilities have the billing infrastructure necessary to allow for loans to be repaid via their utility bills?
  3. Do prohibitive regulatory issues exist? (In some jurisdictions, implementing on-bill financing would require regulatory changes.)

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