Recently, HB&C produced a clean energy financing gap analysis for the State of Colorado, (more on that in an upcoming blog post, but it can be downloaded here: Colorado Clean Energy Finance Gap Analysis). Part of that analysis required clearly defining the financial instruments that HB&C considers to be commonly used for clean energy upgrades (renewable energy and energy efficiency).
Interestingly, the majority of these products are not used solely for clean energy upgrades (save for PACE, but even that is essentially a riff on the idea of a local improvement district), but are essentially financing products with enhancements, features, or regulations that, depending upon the lender of record, are modified specifically for the purpose of financing clean energy upgrades in a variety of sectors.
In essence, this post represents a very miniaturized, abridged and pithy clean energy finance encyclopedia, and is an excellent starting point for anyone looking to understand the instruments used to finance clean energy upgrades.
Revolving Loan: A revolving loan allows for continual access to a set amount of capital. Here, HB&C includes typical bank loans and lines of credit, as well as credit cards.
Lines of Credit: Obtaining such financing often involves longer and more onerous application and underwriting than other instruments included in this analysis. Particularly with a line of credit, once obtained, this is a relatively easy way to access additional capital. In a residential context, a line of credit can involve a home equity line of credit; however such borrowers must have sufficient equity in the home. On the commercial side, businesses can access business lines of credit. Both may involve initial fees and multiple-week application and approval processes to access the capital.
Credit Cards: While credit cards can be easy to obtain and perhaps are the most convenient source of capital to apply toward a clean energy project, their key drawback is high interest rates, which can range between 10 percent and 30 percent.
Closed End Loan: Closed end loans involve financing that must be paid back in full over a defined period of time, referred to as the term. For this gap analysis, HB&C discusses both secured and unsecured closed end loans.
Secured: The central financial instrument under a secured, closed end loan is a mortgage. This gap analysis identifies multiple mortgage and “green addition to mortgage” products serving the clean energy markets in the state. These products are offered through state and federal entities, including the Colorado Energy Office (CEO), USDA, HUD and the Veterans Administration (VA). The drawbacks to these products are often the requirements and application process that are in addition to the work involved in obtaining a regular mortgage. This is discussed in more detail later in the analysis.
Unsecured: Unsecured, closed end loans are offered through a number of local governments throughout Colorado; many are backed by federal loss reserves. These can be the most effective instruments in financing residential upgrades due to their fast closing times. Rates can range from 3 percent to 12 percent, based on a number of factors including borrower credit, length of term, capital provider, existence of loss reserve or other credit enhancement.
Other Loan Types: The following loan types may or may not fall into the aforementioned, broader categories.
Equipment Leases: Equipment leasing can be an attractive option for a range of clean energy upgrades for qualifying non-residential entities due to competitive rates and relatively expedient funding process.
Capital Equipment Lease: A lease-agreement in which the lessor agrees to transfer the ownership rights to a lessee. In many ways, the capital lease resembles a closed end loan rather than a lease. Rates typically range from 4 percent to 12 percent, and the application process can involve as little as a single page. Due to its convenience, the capital equipment lease is an ideal instrument for many types of efficiency upgrades in the appropriate sectors.
Tax Exempt Municipal Lease (TEML): This is a lease instrument used by government borrowers. The TEML is subject to annual appropriations during every budget year. Thus, the government entity has a legal prerogative to terminate the lease without legal penalty and return the equipment to the lessor. TEML interest rates typically run between 2 percent and 4 percent, making this instrument an attractive product for eligible entities. TEMLs can act as the underlying finance instrument in a service agreement.
Property Assessed Clean Energy (PACE): This is a financing instrument whereby the financing is paid back on the property tax bill. This makes the financing more secure and allows lenders to provide good rates for long terms, often as long as 20 years. Colorado recently launched a commercial PACE program, but does not currently support residential PACE. Commercial rates may range form 6 percent to 8 percent, depending on the lender and project. Commercial PACE is best-suited to serve multi-measure commercial projects in excess of $200,000. At the time of writing, PACE projects are eligible only in Boulder County.
On-Bill Repayment: On-bill repayment or on-bill financing is generally serviced by or provided in partnership with a utility, where the borrower repays his or her debt on the monthly utility bill. Programs can be tailored to serve all sectors. On bill finance is typically capitalized by the same entity that is providing the utility bill collection and repayment mechanism, whereas on bill repayment can use third-party capital but collect the debt payment on a utility bill.
Energy Services Agreement: An energy service agreement is a contract in which a third party, typically an Energy Services Company (ESCO), provides energy savings to the “borrower” for a fee. These contracts are typically financed through either tax-exempt municipal leases or a service agreement. This also includes energy savings performance contracts, which is the underlying instrument for performance contracting. These arrangements require no up-front costs and generally are considered off the balance sheet. Underwriting is based on the energy savings potential of the project vs. the creditworthiness of the tenant/borrower.
Federal: This category can include loan guarantees, green features of mortgages and other assistance provided through federal agencies such as the USDA, VA and HUD. Federal-based financing assistance is unique to the other capital types because they cover a large range of product types, but tend to cluster around mortgage products. All the USDA-based programs are relegated to defined “rural” areas Other assistance offered through the VA applies only to veterans or to affordable housing through HUD.
Do you have questions about the types of loans that are right for your project or program? Do you want help sourcing capital, designing a program, or improving uptake of your clean energy funds? Let us help you, contact us today!