Effective policies and financial mechanisms can be promoted and implemented that encourage the deployment of energy efficiency and renewable energy and mitigate risks. These range from replicating well-established mechanisms to new and innovative ideas to bring the finance industry’s interest to the sector. Learning from U.S. examples, the majority of policy activity to provide energy efficiency and renewable financing and incentives is occurring at the state and local levels. Preferred policy instruments include; establishing public benefit funds and loan-loss reserves to assist programs in providing attractive financing terms, such as low-interest rates and no money down, and enabling utilities to offer voluntary tariffs for financing energy efficiency and renewable energy improvements. This section outlines some of the most common mechanisms that U.S. cities and states have used, which can be customized in The city to meet local needs to catalyze market deployment of energy efficiency and renewable energy plans, practices, and technologies without spending substantial local government capital.

Financing Models for Energy Efficiency and Renewable Energy Projects

Managed Energy Service Agreements

Energy Service Agreements – ESA, and more recently “Managed ESA” – MESA, are becoming increasingly popular, as they are eliminating the debt put on the client, by treating the upgrade or development as a service and an “off-balance sheet” transaction. The client agrees to pay a fixed or floating rate for the energy savings received, often related to their historical utility bill. The financing party, a private equity corporation or similar, pays the actual cost of the retrofit and utility bills after the retrofit and receives the savings realized over time.69To finance the project, an SPE (Special Purpose Entity) is typically formed by the investor that performs and finances the contracting. Using a SPE limits the risk of the project to the amount invested. The disadvantage of this arrangement is the relatively high transaction cost of establishing a SPE which can be difficult to motivate for small energy retrofit projects.

See e.g. New York City Energy Efficiency Corporation (NYCEEC) uses MESA by partnering with building owners and the private sector to help shift the performance risk and the funding responsibility and lower the barriers for energy efficient retrofit projects in the city.71 Further information is available at: www.nyceec.com.

Energy Savings Performance Contracts

The most mature of the presented mechanisms, where an Energy Service Company (ESCO) acts as administrator, contractor, and guarantor for EE projects. The savings that are realized are split between the ESCO and the customer for a set number of years – until the loan payments are completed. If the assessed energy and cost savings aren’t met by the project, the ESCO pays for the difference to the customer. Recently, in the U.S., the administrator role has been moved from the ESCO to a third-party company to enhance transparency and fairness in the process. Financial institutions have started to help lower transaction costs by streamlining smaller ESPC projects, reducing the overall risk, and aggregating smaller projects to a financially more beneficial scale.

See e.g. Pinal County, Arizona (for municipal application) – pinalcountyaz.gov/Departments/PublicWorks/GoingGreen/Pages/CountyFacilities.aspx

On-Bill Financing / Repayment

Using established energy utilities as a stable mediator between investors, contractors, and energy end-users is another way to scale up clean energy financing. In this case, utilities are primarily in charge of billing and payment processes, whereas customers pay off the debt of the investment on their energy bill – which is tied to the savings achieved in comparison with previous energy bills (e.g. 2/3 of saving – so that the customer keeps 1/3). Repayment tariffs can either stay with the customer – so that a tenant who moves pays the remaining balance or stay with the same meter – so that the repayment program is inherited by new tenants. By tying the investment needed (and the loan taken) to the utility and the utility bill, rates can be brought down with longer-term repayment. Since utilities have existing billing relationships with customers and access to energy usage information, the on-bill payment model substantially lowers set-up barriers for such projects.75 Eligibility criteria need to be carefully developed to protect all parties, and both contractors and lenders should be continually monitored in this long-term model. On-bill finance programs use utility or ratepayer funds, while On-bill repayment programs use third-party capital.76

See e.g. California www.energy.ca.gov/efficiency/financing/ and similar programs in other States: http://energy.ky.gov/Programs/SEE%20KY/March%202012%20Meeting/ Residential/ACEEE_On- Bill%20FInancing%20Review_Dec%202011.pdf and www.edf.org/energy/obr.

Warehouse For Energy Efficiency Loans

The purpose of “Warehouse for Energy Efficiency Loans” or WHEEL, is to provide low-cost, large-scale capital for state and local government and utility-sponsored residential energy efficiency loan programs.77 WHEEL facilitates secondary market sales by purchasing unsecured residential energy efficiency loans originated in participating programs. The loans are aggregated into diversified pools and used to support the issuance of rated asset-backed notes sold to capital markets investors. Proceeds from these note sales are used to recapitalize WHEEL, allowing it to continue purchasing eligible loans from state and local programs for future rounds of bond issuance. At times, WHEEL works as a central warehouse where several states pool their loans for sale, freeing up resources to make more loans.

See e.g. Pennsylvania Treasury Department and New York State Energy Research and Development Authority www.renewableenergyworld.com/rea/news/article/2013/03/energy-efficiency-loans- encounter-obstacles-in-the-secondary-market

Sustainable Energy Utilities 

To aggregate the benefits and spread the risk of EE and RE projects in a larger pool – and when job creation is a target of clean energy initiatives – creating a Sustainable Energy Utility, or an SEU, has proven to have large potential. By creating this non-profit and financially self-sufficient institution, communities can help reshape their bureaucracy and administration to better fit a low-carbon economy. By collecting all administration and all incentives for EE & RE projects under one roof, and leveraging the municipality’s or state’s credit ranking for the SEU’s financial bonds, end-users of energy get easier access to projects, and investors are given more attractive financing opportunities.81 By letting the SEU manage a sustainable trust fund, green bond, or similar, financed by e.g. a fixed surcharge on ratepayer bills, it can in many cases collect enough capital to be a key financier in new sustainable energy projects.82 Various forms of SEUs are still under development and have not been widely tested yet.

Creating standardized frames for SEUs to be deployed across multiple municipalities is expected to enable the growth of SEU’s.83See e.g. the State of Delaware at: www.energizedelaware.org/Sustainable- Energy and the District of Columbia at: www.dcseu.com

Preferential Teams for Green Buildings Offered by Mortgage Lenders and Insurance Companies

Simply spreading the information and knowledge that exists on how energy-efficient buildings have lower operating costs, higher operating income, health benefits, lower building system failure risk, etc. to the lending and insurance sectors, could be a way to indirectly incentivize clean energy projects. This requires no public institutions and does not involve any new mechanisms, but is estimated to be a slow process where banks and insurance companies organically adjust their assessments to reflect these benefits.

Cross-Cutting Mechanisms

Tax-based Incentives for Investors

Some form of government (local or national) driven fiscal support is imperative for clean energy projects to be attractive to equity investors and lenders, as they will be comparing the EE & RE investment against alternative uses of their capital – that may provide higher returns. Tax-exempt bonds have proven to be both a powerful incentive and a relatively easily implemented mechanism to make the clean energy financial climate attractive and leverage the real and perceived uncertainties of such investments.85 In the RE sector investors can also apply to be subject to an Investment Tax Credit based on the capacity installed on the building, or a Production Tax Credit that is realized based on renewable energy production.86

Risk Management & Insurance

Although often overestimated, clean energy finance is still a relatively new market and risks of capital losses are one of the identified market barriers. This is exacerbated in emerging markets with nascent legal and regulatory systems and where transactions involve currency exchange. Both more traditional insurance companies (e.g. Energi and PowerGuard) and agencies spun from the development banks (e.g. the World Bank’s Multilateral Investment Guarantee Agency) are developing mechanisms and policies to ensure investments in sustainable energy projects. Either these insurance programs can act as back-stops to an investment, or a government agency can be involved to take on this role (as has been done with MESA in NYC, with the NYCEEC capital as a back-stop).

The link between the Capital Market and the Customer’s “repayments by savings” (between high-risk investments and safe loans)

In most mechanisms, there is an agency acting as the link between 1) customers, who want a predictable payback plan that doesn’t increase their monthly costs, and 2) the capital market which sees business opportunities in clean energy investments and is willing to take risks for the potential of greater returns. This agency could be an actor on the financial market (often arranged into an SPE) or an existing energy agency, such as an ESCO or a utility. Depending on what type of agency takes on the role as the focal point of an EE project, partnerships with investors, insurance companies, energy contractors, etc. will vary and will need different types of regulatory support.