Characteristics of Strong Programs
While existing financing programs have many limitations that must be addressed, they also offer a number of important lessons on effective program design. Below we provide some lessons learned from the experience of others.
Risk management and credit enhancement is critical.
Default rates for clean energy financing programs that now operate have been low, typically well under five percent. These low default rates are likely a result of careful underwriting in a small number of programs and the fact that the improvements actually reduce borrowers' day to day expenses, thus making loan payments affordable. To some extent the low default rate may also be attributable to 'early adopters' altruistically motivated to reduce their environmental impact. However, it is unlikely that energy efficiency lending has a long or strong enough credit history to attract a significant number of private investors without additional credit enhancements, such as loan loss reserves and loan guarantees, to secure payment. Attracting additional private capital with these credit enhancements is vital to leveraging limited government funds.
Successful programs often engage networks of contractors.
The programs with the highest volume of loans have strong contractor networks and regular program communication with those contractors. Significant time and effort is often spent to make sure the contractors understand and feel comfortable with the program. After all, they are the ones explaining it to customers and often helping customers fill out loan application forms. Some programs also require expertise-based certification. For example, NYSERDA requires that their residential contractors be certified by the Building Performance Institute (BPI), a diagnostics-based training program endorsed by the U.S. Environmental Protection Agency's Home Performance with ENERGY STAR program. This training improves contractors' skills and offers some assurance of quality to home owners.
Programs must carefully manage costs; scale is important for viability.
Program costs can vary based on the types of services offered, how well the programs are run, and volume of the program. Important indicators of program costs are the ratio of audits to installations, and the ratio of loan underwriting to loan acceptance — the higher conversation rate to installations and loan acceptance the better. One option to reduce these costs is to charge for audits, and allow participants to bundle the audit cost in the financing package if they choose to make improvements. Another way of weeding out those who are not serious about making improvements without charging for an audit, which may be a barrier to participation for some, is requiring a preliminary loan qualification as part of program intake. Other expenses, such as the costs of complying with consumer lending laws for residential programs, must also be considered.
When a utility or other organization issues loans itself, it must follow all the notification, disclosure, and other legal requirements that come with consumer lending. There are also numerous fixed costs to running a financing program; economies of scale greatly increase the financial viability of these programs.
Make it easy for both customers and contractors.
A streamlined application process is important both to the customer and the contractor. Any burden for the customer or delay in paying the contractor is an important barrier many programs offer quick application processing, often with approval over the phone for unsecured loans (loans secured by the property take longer). On the back end, it is important to get the payment to the contractor as soon as possible. Several programs deposit the funds directly into contractors' accounts as soon as customers sign the certificate of completion.
Get the support from the organizations and leaders the customer already trusts.
The sponsorship or other supportive involvement of trusted third parties often plays a key role by helping reduce information barriers and transaction costs, and/or providing some measure of quality assurance. Efficiency Vermont trains and mentors its contractors, and provides quality checks and customer information. These types of services encourage those who might not feel comfortable doing this work on their own, gives the customer recourse in the event of a complaint, and increases the quality of the energy improvements. However, it also comes with a higher price tag, due to the staff time required. Getting trusted groups, such as local leaders, local government, non-profits, faith-based organizations, and schools to endorse a program or be actively engaged may be another way to increase interest in a program.