Financing Energy Efficiency Improvements
Financing Energy Efficiency Improvements
Although energy efficiency offers significant savings on energy bills, the “up front” cost of buying and installing new equipment or renovating buildings is a significant barrier to the implementation of most efficiency measures. Financing programs and incentives to assist businesses and consumers in meeting initial costs can overcome the barrier and allow more widespread implementation of energy efficiency projects. Energy efficiency financing programs can be managed at either the federal or state levels of government, or by financial institutions themselves. Among the possible options for energy efficiency financing programs are the following:
- Department of Energy (DOE) Loan Guarantee Program authorized by EPAct2005 provides loan guarantees for clean energy technologies. The program has never awarded funds for energy efficiency projects, and legislative proposals have been advanced to expressly add energy efficiency in the authorization language for this program.
- Clean Energy Deployment Administration (CEDA) is envisioned as an independent administration within DOE to manage a new Clean Energy Investment Fund, which would issue direct loans, letters of credit, loan guarantees, and other debt instruments to encourage the commercialization and deployment of clean energy (including energy efficiency).
State and Municipal Programs
- Many of the funding mechanisms of the American Recovery and Reinvestment Act (ARRA) are routed through the state energy offices, such as the Energy Efficiency and Conservation Block Grant program.
- State revolving funds, such as the Lone Star Fund in Texas, have proven to be successful in financing energy efficiency upgrades in a number of states.
- Property-Assessed Clean Energy (PACE) Bonds are an example of municipal clean energy financing which allows property owners to finance Energy Efficiency retrofits through financing added as a special assessment on the homeowner’s property tax bill. PACE financing provides long term financing that can be transferred along with the sale of the property. More than twenty states have passed laws authorizing the establishment of PACE programs, and DOE allocated ARRA funding for PACE projects in a number of states. Federal mortgage underwriting agencies (Fannie Mae and Freddie Mac) raised questions about the impact of PACE programs on mortgage stability and have declined to underwrite new PACE projects, which has had the effect of “freezing” the program at present.
- On Bill Financing programs provide “up front” funding for energy efficiency retrofits that are then paid back over time through a charge included on the customer’s utility bills. Programs can either provide funds for property owners to pay for EE retrofits themselves or programs can finance EE projects run by the utilities.
- Energy Savings Performance Contracts (ESPCs)help to implement energy savings projects in which a company or utility performing the energy saving work is paid out of the property owner’s energy savings after the project is implemented. ESPCs depend upon contractually agreed and measurable savings so that there is an assurance of payback on the improvements. The property owner realizes energy savings without having to make the up-front investment in efficiency upgrades. A variety of incentives are available to encourage the use of ESPCs at the state and federal levels.
- Energy-efficient mortgages (“EEM”) incorporate the savings from planned EE upgrades in calculating a borrower’s eligibility for a mortgage – based on the assumption that lower utility costs would enable a borrower to qualify for a larger mortgage in order to finance the EE upgrades. While not widely available at present, the EEM provides the opportunity for motivated home buyers or those seeking to refinance their homes, to secure the up-front financing necessary to cover the costs of home efficiency renovations.
- Loan Loss Reserve Funds provide partial risk coverage to motivate commercial lenders to broaden access to finance for energy efficiency retrofits, buy down interest rates on EE projects, leverage public funds, or support EE financing tools such as PACE, bond issues, commercial loan programs for building retrofits, and ARRA funds have been used to support loan loss reserve funds.
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Energy efficiency is smart, nonpartisan, and practical. So are we. Our strength comes from an unparalleled group of Alliance Associates working collaboratively under the Alliance umbrella to pave the way for energy efficiency gains.
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