Thursday, June 23, 2011

Energy efficiency financing: Mass. offers a 'Main Street' solution

By Penni Conner, vice-president of Customer Care, NSTAR

Financing for energy efficiency is a hot topic in the energy industry because cost is a significant barrier to customers investing in energy efficiency measures. Many ideas on what types of financing to offer have been explored.

Included in some of those ideas are complicated and sophisticated Wall Street schemes with expensive, concealed costs. Some proposed financial structures include complex debt instruments, such as securitized notes with credit enhancements that include loan loss reserves, loan guarantees, over-collateralization and credit insurance. Moreover, these financial mechanisms come with a high price associated with buried transaction costs and excessive cost of capital to cover risk and overhead management.

Massachusetts has addressed the financial barrier with a practical ‘Main Street’ approach. This approach uses local Massachusetts banks offering customers zero percent interest loans. Energy efficiency program administrators pay down the interest at very competitive rates. Tapping into the existing financial infrastructure avoids the high cost of capital and overhead management. Massachusetts’ ‘Main Street’ solution is the result of a collaborative approach involving multiple Massachusetts stakeholders, including the Bankers Association, Department of Energy Resources, and energy efficiency program administrators.

The ‘Main Street’ approach, branded as Mass Save Financing, was built upon the very successful Heat Loan program, which was launched statewide in 2006 and has since been responsible for over $80 million in energy efficiency loans targeted to owner-occupied residential customers. Mass Save Financing offers competitive cost of capital, a wide range of products for all customer segments, a choice of lenders and robust financing.
 

Competitive cost of capital: Energy efficiency financing rates are very competitive, and generally are comparable to the home equity line of credit loans for the residential sector and to equipment and construction loans for the commercial and industrial sector. Program administrators pay the net-present-value of the cumulative interest earned by the lender when a loan is appropriated. The value of this approach is that lenders see the energy efficiency investment as low-risk. So, the lenders develop financial products at current rates without requiring credit enhancements.

Wide range of products for all customer segments: The new and expanded Mass Save Financing now offers interest-free loans to multiple customer segments. For the residential segment, loans are offered from $500 up to $25,000 for owner-occupied and non-owner occupied customers. The commercial, industrial, multi-family and non-profit sectors have loan options of up to $100,000 with terms of up to seven years. Custom loans and financial products are also available to meet customer-specific requirements.

Choice of lenders: More than 45 local banks and credit unions are offering loan products to energy efficiency customers.  Many of the participating lenders boast market capitalization over $1 billion each and are considered top consumer and commercial banks in the state.

Robust funding: Contrary to common belief, local lending in Massachusetts has been very robust. According to the Massachusetts Bankers Association, business lending in the state actually grew year-over-year during the recent recession. Local lenders have sufficient capital available to meet the demand for energy efficiency financing.

Massachusetts is successfully addressing the financial barrier to energy efficiency with this practical ‘Main Street’ approach, providing simple, low-cost, easily deployable financing. Massachusetts should accelerate the collaborative approach used to address the financial barrier and apply it to other energy efficiency barriers. The end result for Massachusetts consumers will be an increased adoption of low-cost energy efficiency as an energy supply option, reducing the demand for traditional high-cost generation options.