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Public Service of Colorado Ponnequin Wind Farm

Financing County Energy Efforts and Leveraging Existing Resources

NACo ConferenceJanuary 2010Los Angeles, CA

Craig IsakowDepartment of EnergyMark ZimringLawrence Berkeley National Lab

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Presentation Outline

• Overview of Financing Products and Growth

• Financing Energy Efficiency in County Facilities.

• County Programs to Finance Energy Efficiency in the Residential and Commercial Sectors.

• Beyond Financing. Driving demand for energy efficiency requires sophisticated marketing and outreach strategies.

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Financing Tools

ESCOs/ESPCs

Bonds/Bonding Authorities

Revolving Loan Funds

Credit Enhancements

Private/On-Bill/PACE Financing

Markets

“Financing” Encompasses a Variety of Approaches

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Roadmap to Self-Sustaining Private Financing Markets

Self-Administered

Public Capital Funding

Credit Enhancements

from Public Funds

Open, Competitive Private Market

Revolving Loan Funds

Loan Loss Reserve Programs

Self-Sustaining Private Market

Private Partner-Administered

Public Funds Public Funds

Private Market Confidence in Manageable

Risk

Private Capital Funding

Private Lender Administered

Private Lender AdministeredAdministration

Loan Capital

Risk of Defaults

Local governments around the country are engaging lenders as partners to build programs that make EE loans, and gradually increase the role of the Private Market, until it is fully Private.

Public Capital Funding

Private Capital Funding

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Over $1 Billion of private capital will go to work thanks to ARRA

Programs

Private Capital to be Committed to Energy Efficiency

ARRA Funds Private Capital Total Loan FundsWorkshop Attendees $132,416,000 $501,950,000 $581,300,000Eagle County $900,000 $17,000,000 $17,000,000Boulder $8,000,000 $40,000,000 $40,000,000American Samoa $500,000 $500,000Kansas City $5,300,000 $65,000,000 $70,000,000Maryland $12,400,000 $12,400,000 $24,800,000Plano $700,000 $7,000,000 $7,000,000Shreveport $500,000 $5,000,000 $5,000,000Michigan DELEG $16,750,000 $16,750,000Santa Barbara $1,000,000 $20,000,000 $20,000,000San Diego $1,200,000 $26,000,000 $26,000,000Rutland $1,600,000 $4,500,000 $4,500,000Phoenix $4,000,000 $16,000,000 $20,000,000Fort Worth $500,000 $500,000New Orleans $706,000 $7,000,000 $7,000,000Arkansas $19,000,000 $19,000,000Missouri $9,000,000 $9,000,000Iowa $8,500,000 $16,500,000 $20,500,000Chicago $15,750,000 $99,250,000 $99,250,000Wisconsin $4,210,000 $74,500,000 $74,500,000Cincinnati $17,000,000 $85,000,000 $88,400,000North Carolina $4,800,000 $4,800,000 $9,600,000Bainbridge Island $100,000 $2,000,000 $2,000,000

Other TA Recipients $164,418,000 $599,478,000 $661,728,000Michigan Saves $3,000,000 $60,000,000 $60,000,000California $54,000,000 $250,000,000 $250,000,000Alabama $25,000,000 $35,000,000 $60,000,000Camden City $250,000 $2,500,000 $2,750,000Connecticut $0 $25,000,000 $25,000,000Kitsap County $250,000 $5,000,000 $5,000,000Los Angeles $2,500,000 $25,000,000 $25,000,000New Bedford $120,000 $2,400,000 $2,400,000Seattle $654,000 $4,578,000 $4,578,000Snohomish County $654,000 $13,080,000 $13,080,000Southampton $1,540,000 $4,620,000 $4,620,000Austin $4,000,000 $40,000,000 $40,000,000San Antonio $3,500,000 $35,000,000 $35,000,000Delaware $12,000,000 $24,000,000 $24,000,000Kansas $34,000,000 $34,000,000New Hampshire $10,000,000 $50,000,000 $50,000,000San Francisco PUC $300,000 $3,000,000 $3,000,000Santa Fe $150,000 $1,500,000 $1,500,000Toledo Port Authority $15,000,000 $75,000,000 $78,000,000Cleveland $500,000 $3,800,000 $3,800,000Maryland Clean Energy Comm $2,800,000 $10,000,000 $10,000,000University Park $125,000 $1,250,000 $1,250,000

TotalARRA Funds in

Reserve or Capital Private Capital Total Loan Capital$300 Million $1.1 Billion $1.2 Billion

Data was collected by TA Engagement Leaders, from grantees who have engaged with TA Team to design, develop, and implement financing programs. Additional financing activity is occurring, though in smaller volume than the grantees represented here. December 2010.

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Financing County Building Retrofits

ESCOs/ESPCs

Bonds/Bonding Authorities

• QECBs• Tax Exempt Bonds• Private Activity Bonds• Others (CREBS, Recovery Zone Economic Development Bonds…)

Revolving Loan Funds

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$3 Billion of Untapped Opportunity –Qualified Energy Conservation Bonds

• QECBs reduce the county’s borrowing costs. QECBs are subsidized by the U.S. Treasury. The QECB issuer pays the investor a taxable coupon and then receives a rebate from the U.S. Treasury. Currently, this rebate reduces net interest rates by 3.8%

• Counties may be eligible issuers. Counties are eligible if their population (less any large city with pop >100k) is greater than 100,000. $3.2 billion total issuance capacity has been allocated by Dept of Treasury.

• A variety of energy efficiency and renewable energy projects are eligible for financing including capital expenditures in public buildings

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QECB Example

• Boulder County, CO• $5.8 million QECB issuance in February 2010 to fund

energy efficiency capital improvements in county facilities

• 3.45% interest, 17 year maturity– Bonds were issued as tax credit instruments not cash pay

instruments—cash pay bonds are typically garnering more attractive interest rates of 2-3%

• Improvements included building envelope,HVAC, lighting, controls in 6 county facilities

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Residential, Commercial and Industrial Retrofit Tools

ESCOs/ESPCs

Bonds/Bonding Authorities

Revolving Loan Funds

Credit Enhancements

Private/On-Bill/PACE Financing

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The basic principles of Credit Enhancement Programs

• Absorb Risk: Use public funds to absorb the top level risk of default, effectively paving the way for private capital to invest in innovative energy efficiency loan portfolios.

• Leverage: Use private capital to carry the bulk of the capital burden for loans, resulting in leverage ratios of up to 10:1.

• Integrate Private Expertise & Effort: Partner with institutions that possess underwriting and loan processing expertise to reduce overall program operational costs.

• Standardize to reach Efficiency of Scale: Ensure that all loans conform to best practices, thus providing access to large-scale secondary markets, resulting in lower risks and total costs and lower loan rates to consumers.

E.G. Debt service reserve, loan loss reserve, guarantees

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PACE Status Update

• Regulator Opposition. Most existing and emerging PACE programs have been halted due to Federal Housing Financing Agency (FHFA) opposition (exceptions: Babylon, NY & Sonoma County, CA). Opposition is primarily to PACE lien seniority.

• Gloomy Residential PACE Outlook. A regulatory resolution to FHFA’s concerns is unlikely. A legislative or legal resolution is possible, but timing remains uncertain. Subordinate-lien PACE faces multiple challenges.

• Commercial PACE Outlook Brighter. The Office of the Comptroller of the Currency (OCC) position on PACE is unclear, but pilot programs are moving forward and we hope for clarity from the OCC soon.

For more information, please read LBNL’s PACE Status Update: http://eetd.lbl.gov/eap/EMP/reports/ee-policybrief081110.pdf

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• PowerSaver is designed to support home energy improvement loans through mainstream lenders to consumers who can afford to make proven, energy saving measures.

• HUD insurance covers up to 90% of loan in event of default—this lowers interest rates to borrowers

• Private lenders originate, fund and service the loan

• Maximum $25,000 up to 20 years

• Participating lenders will target markets that have already taken affirmative steps to support home energy improvements.

FHA Power Saver Pilot Program Launching Soon

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Beyond Financing….

• Financial products must be designed with a holistic, complete program in mind

• They need a complement of programs

– Marketing & Outreach

– Workforce Development & Contractor Certification and Training

– Evaluation, Measurement, & Verification

• And they need to be responsive to the consumer both when they are making their purchasing decision, and throughout the lifecycle of the program

Limited success to date motivating large numbers of Americans to invest in comprehensive home energy improvements, especially if they are being asked to pay for a majority of the improvement costs.

But we can learn from past programs…

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Question: How can millions of Americans be persuaded to divert valued time and resources into upgrading their homes?

What We Did:

Case studies of 14 residential energy efficiency programs

Review of relevant marketing and behavioral research reports and presentations

Phone survey of 30 home performance contractors

Interviews with key experts

Report, listserves, upcoming & past webinars, and other resources:

http://drivingdemand.lbl.gov/

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What We Cover

o “Retrofits” are a Tough Sello Lessons from Behavioral Researcho Engage Trusted Messengerso Work Closely With Contractorso Identify the Target Audienceo Sell Something People Wanto Language Matterso Design and Evaluate Programs to Learn What Works

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Engage Trusted Messengers

• Start with local opinion leaders. Involving local opinion leaders to promote a program takes advantage of existing social relationships and networks.

• Model success. The stories – told both in person and through marketing media – of early adopters/opinion leaders who have successfully gone through the program can attract others.

• Encouraging personal contact with peers. Person-to-person communication with peers can be one of the more effective ways to motivate action, especially if the “messenger” is someone the potential participant already knows and trusts.

• Local control. Allow the local community to have ownership of the program.

• Get buy-in from local organizations. Ask for the support of respected local organizations, especially nonprofits.

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Partner with contractors

• Contractors will be the primary sales force for most programs

• Design a program that contractors want to sell

• Consider sales training & marketing incentives for contractors

• Not all contractors have the same business model – structure incentives to move contractors toward more comprehensive upgrades

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Driving Demand Resources

Download the Report and Join the Driving Demand email listserve

(announcements only or the discussion group)

http://drivingdemand.lbl.gov/

Case StudiesWebinars

Additional Resources

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The Department of Energy has assembled a team of finance experts to help develop finance programs for SEP and EECBG grantees.

These experts have deep experience in designing innovative financing programs and matching appropriately structured financial products with deep capital markets.

Find a library of resources at http://wip.energy.gov/solutioncenter

To request specific Technical Assistance go to the TAC website athttps://tac.eecleanenergy.org/Default.aspx

Misplaced your username or password? Phone the call center at 1-877-EERE-TAP (1-877-337-3827)

Technical Assistance – Finance Programs

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Questions?

Craig IsakowDepartment of Energy

craig.isakow@ee.doe.gov

Mark ZimringLawrence Berkeley National Laboratory

mzimring@lbl.gov

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Sell Something People Want

Comfort: Increase your family’s comfort and wellbeing.

Practical Investment: Make an investment to protect and maintain your most valuable asset.

Self-Reliance: Become a self-reliant American – reduce your energy dependence.

Social Norm: All of your neighbors are making home energy improvements.

Health: Protect your family from mold allergies and asthma.

Community: Join your neighbors in supporting local prosperity, reducing energy waste, and protecting the environment for future generations.

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Language Matters

• Words have power – programs should choose the language they use carefully. The terms “audit” and “retrofit” are not effective.

• Communication style matters, and this can require training to get right. Programs should consider using vivid examples, personalizing information, using statements of loss rather than gain, and inducing a commitment from the homeowners.

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LBNL Areas of Research

• Technical assistance to ARRA$ recipients, especially around financing and retrofit program best practices

• Driving demand for energy efficiency

• Interactions between ARRA$ and ratepayer programs and post-ARRA energy efficiency program sustainability

• Energy efficiency services sector (EESS) workforce size, expected growth, and training/education needs

• LBNL's EE/RE publications can be found here:

http://eetd.lbl.gov/ea/emp/ee-pubs.html

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Options

Finance Product Design

Capital Source

Secondary Markets

Local Lender

Bonds (QECB, CREB, etc.)

Loan Administration

Payment Collection

ARRA (SEP, EECBG, BB)

Self-administered by Public Agency

Financial Institution Partner

Financial Institution Partner

PowerSaver(FHA

Guarantee)

Utility Company (“On Bill”)

Tax Bill

Public Agency

Every finance program must address the same basic functions, but an array of options can be selected within each function to meet local goals, and solve specific challenges.

Public

Private

National Lender

Public

Private

Public

Private

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A Typical Integrated Residential Energy Efficiency Program

EM&V Financing Workforce Marketing

Build Measurement System

Create Demand for AuditsScore Marketing

CampaignsPerform Audits

Take Loan Applications

Underwrite

Issue Funds Perform Project

Score Applications to Loans Rate

Score Audits to Applications Rate

Evaluate Work and Energy Performance

Evaluate Loan Performance

Tie Energy and Loan Performance

Collect Payments

Replenish Capital

Communicate Success Stories

Nurture cycle for continued demand

Sell Projects & Loans

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Appendix

Slide 26

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Options

Finance Product Design

Capital Source

Secondary Markets

Local Lender

Bonds (QECB, CREB, etc.)

Loan Administration

Payment Collection

ARRA (SEP, EECBG, BB)

Self-administered by Public Agency

Financial Institution Partner

Financial Institution Partner

PowerSaver(FHA

Guarantee)

Utility Company (“On Bill”)

Tax Bill

Public Agency

Every finance program must address the same basic functions, but an array of options can be selected within each function to meet local goals, and solve specific challenges.

Public

Private

National Lender

Public

Private

Public

Private

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How a Loan Loss Reserve Works

1. A Loan Loss Reserve is established in partnership with a private lender to provide the lender a measure of certainty in a developing, unproven market.

2. A reserve of a certain percentage of a portfolio of loans is put in escrow by the public entity, and is guaranteed to recoup the first losses of the portfolio. Liability is capped at the total value of the reserve account.

3. If losses do not exceed the reserves, the remaining reserves are returned to the public entity at the conclusion of all loans in the portfolio.

4. The size of the reserve is determined in negotiation with the private lender. It should be sufficient to allow the lender a high degree of confidence that the default rate of the portfolio will not require additional risk premium to be priced into the borrowers rate. Typical loss reserves for residential unsecured energy efficiency projects are 10% to 15%.

5. As the performance of statistically significant numbers of loans is established, lenders will be able to better understand the associated risks and will reduce their dependence on loss reserves. Ultimately, if the market proves to be as strong and self-sufficient as is expected, all Loan Loss Reserve funds could be returned to the public entity to be disposed of through another ARRA approved activity.

Slide 28

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Options

Revolving Loan Fund Example

Capital Source

Secondary Markets

Local Lender

Bonds (QECB, CREB, etc.)

Loan Administration

Payment Collection

ARRA (SEP, EECBG, BB)

Self-administered by Public Agency

Financial Institution Partner

Financial Institution Partner

PowerSaver(FHA

Guarantee)

Utility Company (“On Bill”)

Tax Bill

Public Agency

Public

Private

National Lender

Public

Private

Public

Private

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Options

Loan Loss Reserve Example

Capital Source

Secondary Markets

Local Lender

Bonds (QECB, CREB, etc.)

Loan Administration

Payment Collection

ARRA (SEP, EECBG, BB)

Self-administered by Public Agency

Financial Institution Partner

Financial Institution Partner

PowerSaver(FHA

Guarantee)

Utility Company (“On Bill”)

Tax Bill

Public Agency

Public

Private

National Lender

Public

Private

Public

Private

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Financial Terms

Sgationlide 31Financing programs allow payments on investments to be stretched out in time, the same way that the

benefits created from the investments are accrued

Financial Incentive Covers broad range of mechanisms to convince a customer to engage in EE – can include direct payments such as rebates, coupons, and gifts, or more sophisticated financial vehicles such as Interest Rate Buydowns and Credit Enhancements

Rebate Not a financial tool, just a controlled bribe to a consumer to incent specific behavior

Interest Rate Buy-down A payment to a lender which covers a portion of the interest payments that due to them for issuing a particular loan. The IRB allows the lender to charge the borrower a lower interest rate because the public entity has covered a portion of their tab.

Financing Program An organized effort to match borrowers with capital. Both Management and supply of capital can variously be either by public entity or private partner.

Revolving Loan Fund A financing program that lends public dollars directly to borrowers. As the loans are repaid, the dollars can be loaned out to additional borrowers. Losses will be incurred to diminish the fund, but can be mitigated with interest and fees to extend the sustainability of the fund. The RLF can be managed by either a public entity or private partner.

Credit Enhancement A mechanism that reduces the risk associated with an investment, making the investment more attractive, and lower-cost. Credit Enhancements are used to convince investors to engage in a particular investment despite a concern about its potential risk of default. Most effectively used in environments that carry a high degree of Unknown Risk, not actual likelihood of default.

Loan Loss Reserve A financing program in which a public entity pledges to repay a lender for a portion of the losses experienced on a portfolio of loans. The LLR typically covers the first 5 – 20% of losses. Private lenders carry the capital burden, while the public funds carry the risk burden. Maximum liability for losses is limited to the funds in the reserve.

Secondary Market When the originator of a loan sells it to another investor, a secondary market is said to exist. This can take many forms, from open liquid markets for bundled securities, to highly conservative participations in diversified portfolios of investments. In general, financial institutions often specialize in either origination of loans or investment in large blocks of loans. When the originator is able to sell a portion or all of a loan to a secondary investor, that originator’s capital is replenished and they are able to make additional loans.

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• Job creation in local clean energy– Top 25 job-creating program on Recovery.gov – 3440 direct jobs last quarter (July-Sept.) and growing– Investing in training and education

• Injecting stimulus into local economies for clean energy future– Deploying renewable energy and energy efficiency technologies – Direct grants to the communities where over 225 million Americans live

and work plus smaller communities through indirect state grants– Grantees developing tailored strategies for their local economies

• Investing in Energy Independence– Reducing foreign oil consumption– Cutting fossil fuel use

Key Features of EECBG

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• New program bringing together DOE and over 2,000 local communities for the first time in order to– Lower total energy consumption;– Create and retain jobs;– Improve energy efficiency; and– Reduce carbon pollution.

• EECBG funds $3.2 billion for 14 activity types– All formula grants obligated $2.71B to

2190 individual grantees– $390 million for competitive Better

Building Program for innovative models of whole-neighborhood retrofits

– $64 million additional competitive awards for non-formula entities

DOE’s Largest Local Program – Every Community in America: EECBG

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Majority of Funds for Capital Equipment Investments with Immediate Benefits

Smaller but Important Investments in Shifting Local Approach to Energy

EECBG Making Investments for Today and the Future in Every Corner of USA

$89

$98

$183

$194

$429

$1,141

$0 $500 $1,000 $1,500

Government, School Procurement

Financial Incentives for EE

Renewable Energy Market Development

Transportation

Loans and Grants

Building Retrofits

Investment Amount (M)

$16

$21

$45

$83

$89

$0 $50 $100

EE Rating and labeling

Codes and Standards

Workshops, Training and Education

Building Audits

Clean Energy Policy

Investment Amount (M)Note: Not representative of 100% of funds