A client interested in forwarding clean energy legislation, including the formation of a state green bank, commissioned Harcourt Brown & Carey (HB&C) to conduct an inventory and gap analysis of financing products used for clean energy (energy efficiency and renewable energy) improvements in the state of Colorado.
Defining The Market
To better understand the landscape of clean energy finance products in Colorado, HB&C started by creating a statewide inventory of the existing specialized and non-specialized financial products commonly used or directed toward clean energy upgrades in the following sectors:
- Small Commercial
- Large Commercial and Industrial
- K-12 Public School Districts, Municipal, State, Nonprofit/Institutional
- Single-Family Residential
- Multi-Family Market
- Multi-Family Affordable
Through this inventory, HB&C identified the financing products currently serving each of these markets, and identified individual barriers based on the elements of capital, confidence and convenience. These “3 C’s” represent the critical difference between a financial product that merely exists and a financial product that is actively and successfully serving a clean energy market sector. The “3 C’s are defined here:
- Capital: Does money exist that is dedicated to serving this sector? Is that money available and accessible to the borrowers/participants within that sector at attractive rates and terms? Is the risk-return relationship appropriate such that capital providers are willing to invest in the sector?
- Confidence: Do the individuals who interact with this product trust that it will meet their needs?
- Contractors: Are contractors confident that they will be paid on time and that the application process will not hamper their ability to make the sale?
- Borrowers: Are borrowers confident that the product is provided by a reputable source and that there are no hidden fees or charges?
- Partners: Are utilities and energy efficiency programs confident enough in the product to approve and endorse it?
- Capital providers: Are financial institutions deploying capital confident that they will see participation in the product and that they will see returns on their investment, with predictable levels of default?
- Convenience: Is the product easy to understand and easy to interact with, and is the information about it easy to obtain? Financing that requires lengthy application processes or other unnecessary barriers see much lower participation. Can contractors easily use the product, or does it require specialized knowledge to incorporate the product into the sale?
Spotting the Gaps
As a result of the analysis, HB&C identified that lack of capital to overcome first-cost barriers for clean energy projects is not a significant obstacle. It is, rather, improvements in the quality and delivery of the capital that represents the largest opportunity for creating a robust clean energy finance marketplace.
Thus, the gaps identified fell into two main categories: product gaps and delivery gaps.
Product gaps represent specialized products that either do not exist in Colorado or exist in such a limited scope that their impact is negligible. Identified product gaps include the following:
- Residential PACE
- Unsecured residential financing
- Low- and moderate- income (LMI)-specific products
- On-bill finance
Despite the product gaps listed, capital does exist to bring them to market. The current barrier to their implementation revolves around the issues of who would do the work to structure the products, direct the capital into them and bring them to market.
Delivery gaps represent barriers between capital and products that currently exist to serve the clean clean energy marketplace, and their deployment into projects. Products suffering from delivery gaps include both specialized and non-specialized products.
Specialized products currently consist of the following:
- Service agreements
- Tax-exempt municipal leases
- Some capital leases specifically geared toward clean energy projects
- Commercial PACE
- Green mortgages
- Some federal products and programs
- Unsecured, clean energy-specific, residential loans
Non-specialized generally fall into these categories:
- Most generalized capital leases
- Lines of credit and standard consumer and business bank loans
As a consequence, many of the gaps identified have less to do with the availability of capital, than with the structure and the ease of access to it. This summary provides an overview of some of the non-sector-specific gaps HB&C identified.
Some specific actions HB&C identified that could remedy gaps across all products and sectors include the following:
- Product enhancements, such as buy-downs, loss reserves and other credit enhancements to make both specialized and non-specialized financing products more marketable and accessible. Product enhancements could result in the following improvements
- Improve use of/participation in clean energy specialized products by making them more marketable and attractive to borrowers, improving access to them, and improving cash flows associated with their use by improved rates and terms
- Make non-specialized products clean energy-specialized by requiring that they be used for specific clean energy-related measures in order to access enhanced product features
- Development and provision of one-stop finance advisory services, where clean energy projects are matched with the proper financing instrument and lender. This would serve to:
- Remove the onus of becoming a financing expert from project developers/contractors while making expertise readily available to every project
- Allow for greater confidence and convenience when pitching projects
- Increase use of both specialized and non-specialized financing products
- Improve use of any product enhancements
- Introduction of non-existent products. Gaps currently exist in the market. Allowing for and facilitating the existence of residential PACE, more widespread on-bill financing, LMI specific products, and an easy- to-use unsecured residential finance product would remove these gaps and create a more comprehensive marketplace serving all sectors.