A revolving loan fund (RLF) is a pool of capital from which loans are made and to which the loan repayments are returned and lent out again. The fund revolves in the sense that the loans initially lent out come back to be used again for similar projects, and the same capital is circulated again and again. This is why RLF capital is sometimes referred to as “recycled” or “evergreen.” Typically, the principal repayments go back into the fund, and the interest payments and associated lending fees paid by the borrowers go toward the administrative costs of running the RLF (EERE 2009).
RLFs are frequently created to serve a specific mission, target product, or intended market (such as energy efficiency, low-to-moderate income households, or small businesses). The loan agreement can be designed to permit only the purchase of certain technologies or products, or to fund projects with explicit goals (such as measured electricity savings). Additionally, an RLF may have an overarching goal for the entire portfolio—such as total greenhouse gas (GHG) emissions reductions—and may target specific project types to reach that goal.
Utilities, state and local governments, nonprofits, state energy offices, and universities can operate RLFs. Programs can be administered entirely by one agency or operated in conjunction with a third party. Another variant is a loan-participation model, where a third party (such as a state energy office) lends part of a loan at a below-market rate and a private lender provides the rest. The two thus lend in partnership, resulting in a loan that offers more attractive funds than would be possible with private financing alone. Further, the third-party funding typically has a lower interest rate, so the blended funds may create a product with better terms for borrower (NASEO 2016).
The initial seed money for RLFs can come from public funds, ratepayer funds, regional GHG auction revenues, bond issuances, and/or private capital (NASEO 2013). RLFs can be set up with just one type of funding or funder, or can acquire capital from various sources. RLFs can be used to fund energy service performance contracts (ESPCs), Property Assessed Clean Energy (PACE) programs, on-bill programs, and loan or lease programs (NASEO 2016).
RLF Benefits
- RLFs can be designed with attractive terms, such as below-market or 0% interest rates or longer loan terms. Because they are typically goal-oriented, they can create a financing product to solve a very particular need, catering to both the borrower and the goal (e.g., to be bill neutral).
- RLFs can be used in conjunction with other programs or credit enhancements, such as rebates or loan loss reserves.
- Many states and cities already have experience with RLFs. For example, the Clean Water State Revolving Loan Fund combines federal and state funds to provide low-interest loans to water quality and water efficiency projects (EPA 2016).
- RLFs can incorporate private financing, allowing state and local governments to leverage their funds and potentially reach goals that are unattainable with their own funding alone.
- Mission-driven RLFs typically target underserved markets, where private investment is lacking or nonexistent. If the RLF can demonstrate that lending to these markets is profitable, it might encourage private lending and create a market that no longer requires subsidies.
RLF Drawbacks
- After the initial pool is lent out, lending activity slows considerably as the repayments that replenish the pool of capital come in over many years.
- Each funding source may have its own stipulations on how the money can be used. Having multiple funding sources with varying stipulations can make administering the fund a complicated process.
- RLFs have additional administrative costs related to sourcing funds and administering loans. This, however, is not unique to RLFs; all new programs have these costs.
Examples of RLFs in Energy Efficiency
Texas LoanSTAR
Established in 1988 with $90 million of petroleum violation escrow funds, LoanSTAR has made $395 million of loans, contributing to $419 million in energy savings (NASEO 2013, SECO 2016). The program has made a total of 237 loans, targeting buildings in the municipal, university, school, and hospital sector (SECO 2016). For further information, including examples of legislation, see the program’s webpage: http://seco.cpa.state.tx.us/ls.
Nebraska DESL
Nebraska’s Dollar and Energy Saving Loan (DESL) program was established in 1990 from petroleum violation escrow funds, and further capitalized with State Energy Program (SEP) grants over time. The program has invested $151 million in more than 28,000 projects (ACEEE 2016). The fund operates with private lenders in Nebraska and purchases parts of eligible loans, blending public and private capital to drive the interest rate down and make loans more affordable for customers. Including both the RLF and the private investment it leverages, DESL has spurred $322 million in clean energy investment (ACEEE 2016). For more information on the program, see its website: http://www.neo.ne.gov/loan.
Important Considerations when Setting Up an RLF
Establish a Goal for the Fund
The intended market and customer greatly impact funding sources and loan terms. For example, a fund created to enable energy efficiency retrofits in multifamily homes may have entirely different funding sources and loan terms than a renewable energy portfolio for small businesses.
Decide What Types of Purchases Can Be Made with the Borrowed Funds
Deciding which technologies or costs the borrowed funds can be used for is important. For example, some programs require that the purchased product’s expected energy savings exceed the monthly financing cost (that is, that it be bill neutral). If that type of arrangement is part of the fund’s goal, then it is important to carefully consideration what can and cannot be purchased with the borrowed funds.
Carefully Consider the Funding Sources
The initial seed money for RLFs can come from a number of sources; however, each funding source will have its own parameters. An RLF’s biggest benefit is that it can be designed to fit a specific need and is therefore “flexible” financing. RLF flexibility is largely determined by the program’s guidelines, but additional parameters from funders—which can increase with each additional funder—can decrease the program’s flexibility.
