Incentives, zero interest can increase affordability.
Whether the nation’s economy is waxing or waning, the task of securing capital to pay for energy-efficiency projects can be a challenging one. When business is booming, most CFOs are deluged with competing investment opportunities. Proposals that support the core business - expanding the product line, production capacity, or market share, for example - typically take priority over energy-saving initiatives. Once the cycle reverses itself and an economic downturn ensues, the first reaction of many CFOs is to freeze all capital spending until business improves. Ironically, even investments that could help the organization’s bottom line by lowering operating expenses have a slim chance of being funded until the economy recovers.
On-bill financing offers a novel solution to this seemingly perennial shortage of capital for energy-saving projects. There are two principal approaches to on-bill financing: tariff-based systems and on-bill loans.
In a tariff-based system, the cost of the energy-efficiency improvement is linked to the meter, not the customer, which allows the repayment period to extend beyond the current customer’s tenure. Associating the charge with the meter rather than the customer yields another important benefit - some jurisdictions consider the tariff-based charge to be part of the customer’s utility bill, rather than a loan. This nuance provides new options for governments and other organizations that would benefit from efficiency-related capital spending but are prohibited from assuming any new debt to fund it, particularly debt that spans multiple fiscal years.
The Alliance to Save Energy (ASE) detailed many of the pros and cons of tariff-based systems and on-bill loans in a recently released brief called, “Paying for Energy Upgrades through Utility Bills,” authored by Matthew Brown. The report notes that while New Hampshire had the earliest experience with tariff-based systems, other tariff-based systems in Hawaii and Kansas are now producing additional data on the effectiveness of this approach. It also mentions that Michigan has adopted legislation that may result in an on-bill tariff program.
As for on-bill financing programs, ASE’s report cites several that have been operating in Connecticut, Massachusetts, and Rhode Island for almost two decades as well as others that have been adopted more recently in California. ASE’s report concludes by saying that “these programs continue to be refined, with changes to the balance between rebates and loans, loan terms and program design features.”
Table 2, which is excerpted with permission from ASE’s report, offers an example of how an on-bill financing arrangement might work. By combining utility incentives, an interest rate of zero on the amount financed, and the projected monthly cost savings, this hypothetical project produces a positive cash flow for the customer regardless of which of the three loan terms is selected.
For more information on these and other valuable programs that encourage the implementation of energy-efficiency measures, visit ASE’s website at www.ase.org.
Coupling Incentives With On-Bill FinancingNational Grid’s On-Bill Financing (OBF) is an excellent example of a program that goes beyond traditional prescriptive incentives and helps customers overcome financial barriers. OBF is presently offered to small business customers in Massachusetts, Rhode Island, and New Hampshire. It is also offered on a limited basis to commercial and industrial (C&I) medium business and municipalities in Massachusetts. National Grid pays 40% to 70% of the project cost and the customer pays the rest over a period of one to 24 months, with the amount appearing as a line item on the customer’s electric bill. The interest rate is 0%, and the utility discounts the amount by 15% if the customer repays the loan in one month for the small business program only.
National Grid reports that its OBF approach increases the ratio of projects signed to proposals offered. It also reduces the “sales cycle” - in fact, many projects are signed at the time the proposal is presented. Billing on the regular monthly electric bill seems to result in lower arrearages and defaults than if the customer contribution were billed separately. Offering a loan at zero interest decreases the complexity of the transaction. Finally, since the tool is financing the customer, not the meter, the utility is not required to put a lien on the property, and the transaction does not encumber the property’s next owner in any way.
In nearby New Jersey, PSE&G’s Small Business Direct Install Program combines on-bill financing with other extraordinarily helpful features. An eligible customer receives a free on-site energy audit of its business, followed by a report that details energy-saving recommendations. If the customer chooses to install any of the specified upgrades, it repays only 20% of the cost over time through a charge that appears on its electric bill. PSE&G currently offers this program to small business customers in Newark and Trenton and plans to expand it to other cities within its service territory in the near future.
By offering capital structures and repayment terms that decisionmakers find easy to understand and approve, a forward-thinking utility can leverage its own financial heft and economy of scale to make efficiency investments more affordable for its customers. As the universe of utilities offering these on-bill financing programs increases, more customers across the country will have another option for pursuing energy-efficiency improvements - an option that can help insulate efficiency projects from the vagaries of capital budgeting cycles. ES
AddendumThe On-Bill Financing Option helps qualified commercial and taxpayer funded customers pay for energy efficient business upgrades through their SDG&E bill. Zero-percent financing is available to eligible customers on qualifying energy-efficient business equipment improvements. Upgrade costs are typically offset with select SDG&E rebates. Loan amount to be financed is a minimum of $5,000 up to $100,000 with a 5-year payback, and up to $250,000 with a 10-year payback for tax-payer funded customers.
Learn how SDG&E's On-Bill Financing (OBF) Option can help your customers save energy and money with 0% financing on qualifying upgrades, including lighting, HVAC, refrigeration, food service, natural gas and other technologies. For more information call 1-800-644-6133 or by e-mail at SDGEOBF@semprautilities.com for more information about this great opportunity!