Financing Program Pitfalls to Avoid

Clean energy financing is not a new concept — there is much to learn from existing and past initiatives. Many programs launched over the years have not had the impact intended. Below we provide some lessons learned from the experience of others.

Pile of pennies

Financing alone is not enough to increase demand.

There are many programs for financing energy efficiency in the United States, but only a tiny fraction of the population has been reached (to find existing programs in your area search: www.dsireusa.org).

No single financing mechanism will meet all financing needs.

Utilities, private lenders, and local and state governments have developed a number of innovative financing programs. These programs and others can serve different markets at different transaction points. Some are streamlined and designed to provide quick access to money to buy energy efficient equipment (furnaces or air conditioners, for example); others are more complex but provide access to larger amounts of money to fund full-scale efficiency retrofits or renewable energy installations through a second mortgage, a secured loan or a primary energy efficient mortgage.

Instead of choosing a single loan product and hoping that it covers all markets and needs, it may be appropriate to either:

  1. choose one market (the appliance replacement market, the small business market, the public facility retrofit market, the residential retrofit market) and focus a loan product and financial resources in that market
  2. create a portfolio of loan products to serve different markets and needs.

To have an impact, programs must either a) make financing available to those who don't already have access, or b) offer financing that is attractive enough to induce additional improvements.

It is relatively easy to provide financing to those who are educated, motivated, and creditworthy — but these are exactly the people who are least in need of financing. Programs must address the financial barriers faced by those most in need of financing, including those with the highest energy cost burdens as a percentage of income, low or fixed incomes, poor credit, and those in rental housing. Many existing programs have credit requirements that include credit rating minimums and debt-to-income limits, and few programs systematically count expected energy savings as increasing the ability to pay.

If a program is targeted to an audience that already has easy access to credit, then the program needs to be attractive enough or easy enough to use that it induces building owners to invest in new improvements that they wouldn't have otherwise made. This "additionality" is important to consider, especially before subsidizing a loan program through an interest rate buy down or other incentives, which can be very expensive compared to other applications of public funds to reduce energy use.

There may be a trade-off between complexity of the loan product and take-up rates.

Some loan products only fund measures identified through an audit to identify cost effective measures on a property-by-property basis. An audit performed by trained and certified energy auditors may identify a wide range of efficiency measures. The alternative to the audit-based approach is a more streamlined, less expensive approach based on a short list of approved measures, often called "prescriptive" measures. Although the audit will identify the wider range of measures, it can also produce a much lower loan volume than one relying on a streamlined approach that finances pre-qualified measures without requiring a full energy audit. The Pennsylvania Keystone HELP program provides a case study of this — despite a subsidized interest rate for measures identified through an audit, most of these loans are for prescriptive measures.