186 On-Bill Financing: Exploring the Energy Efficiency Opportunities and the Diversity of Approaches

Upfront costs continue to be a significant barrier to promoting energy-efficient investments. A number of innovative energy efficiency project financing mechanisms have emerged over the past three decades, all with the intent of reducing the upfront costs for energy efficiency improvements to the consumer. The “on-bill” financing approach represents a range of program designs that use the energy bill as a financial collection mechanism. This approach is uniquely positioned to reduce first-cost barriers in several markets, some of which have traditionally been underserved by energy efficiency finance, such as some classes of buildings and small businesses. While on-bill mechanisms show promise, no single program design is appropriate to all circumstances, and no two existing programs are (or should be) exactly alike. Differences across markets and the regulatory landscape can inhibit differing on-bill approaches from achieving their full potential. Creativity and innovation on the part of program administrators are essential to empowering on-bill programs to penetrate these underserved markets. This paper, which is based on 19 on-bill financing case studies developed through data collection and discussions with program staff, explores various approaches to on-bill financing and highlights key considerations for program designers. The diversity of current program designs suggests that the “best” approach is one that addresses the diversity of utility and regulatory structures, the specific needs of different communities, and the differing state and regional legal and regulatory landscapes. Therefore, this paper provides an overview of diverse current practices across several states with adaptable components, which can aid future programs in identifying opportunities for the innovative design that best suits their individual needs. Current On-Bill Landscape Upfront costs continue to be a significant barrier to promoting energy-efficient investments (Kapur et al. 2011). A number of innovative energy efficiency project financing mechanisms have emerged over the past three decades, all with the intent of reducing the upfront costs for energy efficiency improvements to the consumer. The “on-bill” financing approach represents a range of program designs that use the energy bill as a financial collection mechanism. On-bill programs are quickly becoming popular across the United States. These programs are in a position to leverage a utility’s unique relationship with energy customers to provide convenient access to funding for energy efficiency investments. On-bill financing allows utility customers to invest in energy efficiency improvements and repay the funds through an additional charge on their utility bill. If structured properly, an on-bill program can substantially reduce the cost of and improve access to financing. In many cases, energy savings are sufficient to cover the monthly payments for the financing so that the total monthly charge on utility bills is less than or equal to the pre-investment amount. On-bill financing has a high potential for scalability and has garnered interest from thirdparty lenders, particularly in light of the fact that credit losses on both consumer and commercial utility bills tend to be far lower than for other obligations. Typically, on-bill programs have default rates of less than 2 percent (Byrd & Cohen 2011; Bell et al. 2011). Figure 1. States with On-Bill Programs Sources: Brown 2009; DSIRE 2011; Fuller 2009; Hayes et al. 2011; LCEA 2011 Notes: States with on-bill programs: AL, AR, CA, CT, GA, KS, MA, NE, NH, NJ, NY OR, RI, SC, and WI. States with pilot and/or pending programs: HI, IL, IN, KY, ME, MI, and WA. Currently, at least 22 states are home to utilities that have implemented or are about to implement on-bill financing programs, many of which (Illinois, Hawaii, Oregon, California, Kentucky, Georgia, South Carolina, Michigan, and New York) have legislation in place that supports adoption in various ways. Some states, such as Illinois and California, require utilities to implement on-bill programs. Other states remove barriers to implementation by allowing for a tariff for energy efficiency services or for financing to be collected through utility billing. In New York, legislation has provided for utilities to receive funding to update their billing systems. Additionally, a number of state utility regulators have taken action to explore the feasibility of on-bill programs. Many of these programs are still very new and have not yet attempted to scale up. This novelty makes it difficult to scientifically discern true “best practices.” Yet, the growing interest and number of programs implies that states and proponents believe there is a value to the approach (Bell et al. 2011). Utilities and other program administrators can implement on-bill in a variety of ways. It is most commonly structured as a loan or tariff, but could also be structured as an energy service agreement or lease. No two on-bill programs are exactly alike, which reflects the diversity of utility regulatory structure, state consumer lending laws, housing stock characteristics, and consumer demographics. Beyond the shared characteristic of on-bill repayment, these programs vary in their sources of capital, financing product design, target market, and overall implementation strategy. This paper identifies eleven major areas of consideration for program administrators and discusses how different approaches can be adapted to meet the economic interests of stakeholders and the unique needs of target markets. Program Design Considerations The development of a successful on-bill program is contingent upon several key program design considerations. Many existing on-bill programs leverage lessons learned from earlier programs, but must adapt certain elements of program design to meet the specific needs of their regional stakeholders. Optimizing the potential of on-bill programs requires program administrators to think carefully about eleven critical elements of program design. Fundamental considerations for program designers include:  Program objectives  Target market  Selection of program administrator  Financial product structuring  Capital source After the fundamental considerations are set, secondary considerations should be examined and designed with the goal of achieving the defined objectives. These secondary considerations include:  Credit enhancements  Customer eligibility requirements  Project eligibility requirements  Installation  Marketing  Additional incentives While the descriptions of these elements may seem general, it is important to delve into the fundamental motives for program designers. It is useful to deconstruct programs into basic elements in an effort to demonstrate the versatility of the on-bill mechanism.