More rural cooperatives and cities are now paying for energy efficiency upgrades with on-bill financing, which adds a small, monthly line item to a customer’s utility bill as the repayment vehicle. Yet this financing has not scaled up quickly, prompting efforts in several states to break down its remaining barriers.
On-bill financing programs can bring the up-front costs of energy efficiency upgrades down to zero, particularly when paired with rebates and incentives. They help customers make comprehensive energy improvements, with immediate savings on their energy bills. Because these loans are backed by a utility’s borrowing power, they often have lower interest rates than market-rate lending options.
Rural cooperatives have been leaders in leveraging on-bill approaches to provide their members with guaranteed bill savings from energy efficiency improvements. Electric cooperatives in Kentucky, North Carolina, South Carolina, Arkansas, and Kansas have launched successful on-bill programs. In Arkansas, Ouachita Electric Cooperative reported that in the first nine months after launching its program, more than 90% of customers who were offered the option signed up. In one year, its HELP PAYS program accounted for more than $1.5 million in investment, with multifamily housing accounting for about one-third of the total.
States also see a clear need for on-bill financing programs. As part of major legislation expanding and extending energy efficiency programs in 2016, the Michigan legislature allowed for financing terms of up to 15 years, paving the way for the rollout of on-bill financing programs. To date, however, only the city of Holland’s municipal utility has launched a program. It rolled out the program as one strategy to achieve its long-term energy plan. The state convened a series of workshops in 2018 to discuss scaling on-bill financing, using Holland as a key example. In addition, Hawaii just announced a major on-bill program intended to expand the accessibility of clean energy investments for residents, small businesses, and nonprofit organizations .
Other cities have also embraced on-bill financing to expand the reach of energy efficiency programs to all residents. In 2018, Fort Collins, Colorado, won a $1 million grant from the Bloomberg Philanthropies Mayors Challenge to develop an on-bill financing program targeted at the city’s renters. The EPIC program helps rental and owner-occupied property owners invest in energy-and water-efficiency improvements through a streamlined assessment-to-upgrade process. The program offers low-interest financing for up to 20 years. Fort Collins emphasized accessibility in the program design, requiring no money down, structuring loans to cover up to 100% of project costs, and developing a simple application open to both single-family homes and multifamily properties. The city is now partnering with the Colorado Energy office to develop an EPIC toolkit for other cities that want to adopt the model.
Programs have been slow to ramp up
The most recent comprehensive market study of on-bill financing, published in 2016, found that the tool was responsible for nearly $200 million in lending in 2014. However, on-bill financing was experiencing a relatively slow expansion, with the annual dollar volume for on-bill programs increasing only 4% from 2012 to 2014, compared to 44% for other utility loan programs.
On-bill financing offers an opportunity to expand the pool of customers able to make energy efficiency upgrades. Recent surveying by the Smart Energy Consumer Collaborative found that more than half of respondents expressed interest in on-bill financing if the interest rate was favorable.
So why isn’t it taking off? Only a minority of utilities offer such programs. Many utilities are not interested in using their capital, are concerned about losses, or are reluctant to enter what they see as the banking business. These programs still have a long way to go to scale up. Even successful on-bill financing programs are reaching only a small percentage of customers.
Breaking down barriers
Efforts are underway to break down barriers to on-bill financing. The NC Sustainable Energy Association (NCSEA) launched The Energy Solutions Reserve Fund (ESRF) in 2018 to help mitigate concerns that financing programs expose utilities to risk. Although default rates for on-bill programs have traditionally been quite low, on the order of 0-3%, utilities are hesitant to enter into lending agreements with customers.
Several states have established loan loss reserves for specific state-based financing programs, but ESRF is a reserve fund open to utilities of all sizes across the United States. To date, utilities in Tennessee, Arkansas, and North Carolina have signed up for ESRF, using the reserve fund to help expand on-bill lending programs. According to NCSEA, none of these utilities have had to draw down funds from ESRF, as the average default rate for on-bill financing programs is less than 0.1 percent. NCSEA is also leveraging ESRF to spur lending programs beyond traditional energy efficiency programs, working to sign up programs that could finance investments in renewable energy.
While ESRF and related programs are a good start, utilities are often still reluctant to lend to consumers, because they view such programs as beyond their core expertise. Enticing more utilities to offer on-bill financing will require additional efforts, such as new sources of capital that utilities can use, pre-packaged programs that utilities can easily adopt, and organizations with consumer finance expertise with which utilities can partner. On-bill financing has great potential, but growth is likely to remain moderate unless some of these additional barriers can be addressed.
Editor’s note: In this blog post, we discuss recent developments for a variety of on-bill program types. The rural electric cooperatives we highlight, including Ouachita Electric Cooperative, use an on-bill tariff approach, in which efficiency upgrades are financed not through a loan, but rather through a utility offer that pays for upgrades under the terms of a new, additional tariff. For more background on on-bill program types, see ourfinancing toolkit.