Existing buildings consume more than 70% of electricity and produce more than a third of the greenhouse gas pollution in the U.S. Reducing the energy demand of buildings is vital to fostering a clean energy economy that generates sustainable, high quality jobs and reduces our dependence on imported fossil fuels. The transition to a low-carbon economy will require innovative financing solutions that enable investments in energy efficiency and renewable energy. However, it is important to remember that lack of capital is not the only barrier to these investments. Barriers to investment include:
- Lack of information — Many customers are not currently aware of or interested in these projects, and even if they have some interest they may not know how to arrange for the installation of an energy efficiency or renewable energy project, or may lack the knowledge of where to find the technical assistance needed to address their questions and concerns.
- Transaction costs — The time and effort required to get enough information to make a decision, apply for financing, and arrange for the work to be done may not be perceived as worth the "return" in energy savings and other benefits. Many potential participants may have other priorities for their limited time and money.
- Lack of confidence in savings — Many projects don't guarantee the energy savings; homeowners and businesses may not trust that the improvements will yield the benefits claimed.
- Split incentives — Split incentives occur when the decision-maker does not receive many of the benefits of the improvements. An example is the case of rental property owners who lack incentives to invest in building efficiency upgrades when the tenant pays the utility bill.
- Length of paybacks — Homeowners and business owners may not want to invest in retrofits if they do not plan to stay in the building long enough to recoup their investment.
- Initial capital investment — The first cost of a project may deter investment, either because the resident or business does not have access to capital or they choose to make other higher-priority investments with their available funds.
Financing is one tool to enable energy efficiency and renewable energy investments.
It is important to stress that financing cannot be offered in isolation. It must be combined with other activities such as outreach, education, technical assistance, standardized performance measurement tools, and workforce development. Financing is only useful once building owners decide they want to make improvements, know how to go about it, and when there is a workforce ready to respond. It would be rare for someone to make an energy efficiency investment simply because they found affordable financing, but a lack of affordable financing might prevent someone from making the investment.
It is also worth asking why state and local governments should consider offering financing programs for energy improvements over other options.
Financing programs are almost always more complex to operate than grants, rebates or tax credits, the most commonly offered incentives for energy efficiency and renewable energy. Financing programs usually require a long term commitment of financial and human resources to administer the program in most cases, they also require a credit evaluation process that is not necessary for a rebate program. There are a few reasons that financing programs are compelling tools for encouraging energy efficiency and renewable energy improvements:
- Financing programs increase the impact of limited government funds. A rebate or grant program by definition provides funding at no cost. Once it is spent, it is gone. A financing program can leverage government funds to attract additional private capital and can allow funds to be continually recycled as loans are repaid.
- Financing programs can complement rebate or tax credit programs to eliminate the first cost barrier. Most incentive programs do not cover the full upfront cost. A financing program can operate in tandem with a rebate program to help the customer fund the balance after taking a rebate, so the two are not mutually exclusive. In fact, a rebate or other incentive can further lower the cost of the project and shorten the payback time for financing.
- Financing means customers have "skin in the game". Financing requires customers to pay back the money that they borrow to install clean energy measures. This may encourage them to operate and maintain equipment better than if the improvements were fully paid for by a grant.