Broadening the Reach of Home Efficiency through On-Bill Programs

In the heart of Kentucky coal country, an environmentally minded nonprofit is on a mission to help homeowners reduce their carbon footprint.

Since June, the Mountain Association for Community Economic Development (MACED), which provides financial and technical assistance to Central Appalachian communities, has teamed up with four rural cooperative utilities to offer customers low-cost financing to pay for desperately needed energy-saving improvements that are repaid via a charge on their utility bills.

Although retrofit programs have been available in the area for years, homeowners have been slow to embrace them, even though many reside in aging properties with leaky air ducts, insufficient insulation, and sometimes a broken heat pump.

The pilot, known as “How$martKY,” along with a handful of similar “on-bill” programs being tested and refined across the country, is designed to surmount some of the well-known but formidable barriers that have stymied the market for home retrofits in the past. They include challenges such as high upfront costs, a complex application process, and uncertainty over future energy savings.

“We’ve been in energy efficiency a long time and realize that people are struggling, and we are trying to help them out. We were just not seeing the needle move where it needs to move,” said Mary Beth Nance, director of member services at Fleming Mason Energy, one of the cooperatives participating in the pilot. The utility serves 24,000 customers in the rural, northeastern part of the state.

The pilot is modeled after a similar program run by Midwest Energy in Kansas. The goal is to forge a one-stop approach, thereby cutting through the paperwork and reducing the timeline needed to secure financing and carry out an energy retrofit. The process involves sending an energy advisor to a home to perform an audit, who then works with a representative from the utility to determine the range of upgrades that can be financed out of the projected energy savings. They put together the preliminary paperwork and get bids from contractors.

Ensuring that projects are at least cash-flow neutral is essential for making them affordable, said Jeff Fugate, How$martKY program manager at MACED, which raised the capital for the pilot and is serving as a third-party administrator. But that is also challenging in eastern Kentucky, where many homes use electric heat but rates are comparatively low, averaging 10 cents a kilowatt-hour. To make the energy improvements pencil out, they need to target homeowners whose properties are in need of significant repairs, said Fugate.

Often that job falls to customer service representatives who field calls from homeowners complaining about a cold house or a high bill but who are unaware of their options.

The improvements are paid over 15 years at 3 percent interest. The payments are tied to a home’s meter, so that if the property is sold, the payments fall to the new owner.

The goal is to retrofit 200 homes over the course of two years and, in the process, collect data about opportunities for additional residential energy savings. Pilot administrators are hoping to eventually be able to scan the billing history of a large data set of accounts and pull out patterns that indicate a home has an abnormally high heating load—which could indicate a malfunctioning heat pump or a leaky envelope, or other structural problems—and then reach out to the homeowners.

On a broader, aggregated level, this information could be useful to power generators, because it could help them determine the potential for energy efficiency and reduce the need to build new power plants.
“The distribution cooperatives were interested because it helped them to tackle some member service issues. In addition to the household-level economic benefit, we are also interested in testing whether this adds favorably to a generating utilities’ bottom line,” said Fugate. “We asked, ‘Can we competitively deliver energy efficiency at a price less than they would be paying for new     capacity?’”

Improving Access, but Not a Panacea

This is an underlying question driving programs elsewhere, which are taking a fresh look at the potential for on-bill programs to help states and municipalities comply with greenhouse-gas-reduction goals and create local jobs.
In 2009, as part of Portland, Oregon’s climate action plan with Multnomah County, a project known as Clean Energy Works Oregon began offering long-term, low-interest financing to 500 homeowners for improvements that would slash their energy use by up to 30 percent.

A state law enacted in 2009 requires utilities to participate in such projects, by providing their bills as an energy efficiency loan collection vehicle.

The pilot was a public–private partnership led by the City of Portland Bureau of Planning and Sustainability, and it drew from a mix of federal Energy Efficiency and Conservation Block Grant funds, city resources, and foundation money. Enterprise Cascadia, a nonprofit community development corporation, established a loan fund, underwriting criteria, and operating guidelines.

Program administrators met their target last year, and with the infusion of a $20 million Better Buildings grant awarded by the U.S. Department of Energy as part of the American Recovery and Reinvestment Act (ARRA), the project is expanding to additional counties in the state. The goal is to retrofit 6,000 homes over three years.

The pilot’s success has in part been attributed to a series of steps taken to simplify the process for homeowners. Applicants can apply online and are prescreened to identify homes likely to achieve substantial energy savings. As in Kentucky, homeowners are paired with an “energy advisor” who guides them through the entire process. Eligibility is determined by analyzing utility bill payment history.

Since the program launched in multiple markets throughout the state in mid-March, more than 2,000 Oregonians have applied, 200 projects have been completed, and several hundred more are in the pipeline for completion over the next several months, said Derek Smith, CEO of Clean Energy Works Oregon.

Project size has averaged $12,000, with interest rates ranging from 3.99 to 5.99 percent, depending on income level.

In an email message, Smith stressed that although on-bill repayment has proven to be a draw for consumers, it is not a panacea. The process has benefited customers with good bill payment histories but poor credit who might be denied a loan from a bank using traditional underwriting criteria. But many applicants who have high credit scores but fail to pay their utility bills on time were shut out of the program.

One major programmatic challenge has been finding an efficient way for utilities to upgrade their systems to accept repayment via a customer’s bill, Smith added.

In New York State, utility concerns about the cost of billing-system upgrades were addressed in legislation signed by Governor Andrew Cuomo earlier this year that enables the creation of the first-in-the-nation statewide on-bill repayment program.

The law compels the seven utilities operating in New York to provide on-bill repayment for loans for energy efficiency retrofits offered by the New York State Energy Research and Development Authority (NYSERDA) through the Green Jobs–Green New York program for residential homeowners, small businesses and nonprofits, and multifamily buildings.

Some utilities estimated it would cost them upward of seven figures to upgrade their systems to enable on-bill collection, and that the assistance they would receive from the state to help cover those costs would fall far short of their needs. The legislation sets aside $500,000 to be divided among six utilities, based on their number of customers. The money will be drawn from a $40 million ARRA Better Buildings grant awarded to the state last year. Utilities will also receive $100 per completed loan plus 1 percent of each completed loan amount, both paid up-front on a monthly basis, to defray collection and reporting costs.

There were also concerns that utilities might not be able to claim a portion of the energy savings obtained through retrofits to meet their energy-efficiency goals required by the state. The legislation leaves it up to the Public Service Commission to determine whether a portion can be allocated to utilities, but caps their share at 15 percent of overall savings.

The Public Services Commission is ironing out the details of the mechanism for billing through utilities, and reportedly expects them to be ready by January.

Capturing the  Secondary Market

The Obama administration has funneled an unprecedented level of funding into energy efficiency, and that support has played an important role in making New York’s and other recent programs possible. But efficiency professionals agree that there is simply not enough public money available to subsidize the millions of retrofits needed to give the nation’s building stock a long-overdue efficiency upgrade.

The hope is that by showing lenders that on-bill repayment is predictable and reliable, the latest programs will convince the secondary market that the loans are a good investment.

Although the data concerning residential on-bill loan performance is limited, utilities have for years been offering such programs to small businesses and commercial establishments, with comparatively low default rates.

National Grid, one of the largest investor-owned utilities in the country, has been offering on-bill programs to small businesses since the early 1990s. During the last three years alone, the utility has provided $33 million in loans to more than 16,000 small business customers in Massachusetts, New Hampshire, Rhode Island, and upstate New York, said Bill Codner, a lead energy efficiency program analyst based in the company’s headquarters in Waltham, Massachusetts. National Grid has also provided on-bill repayment plans to more than 400 large commercial customers during that same period. The default rate has ranged from 1 to 3 percent, he said.

Many of the earlier residential programs were built around a model in which utilities would use their own capital to provide financing. But there was concern that if a program grew too large it would have a negative impact on a utility’s balance sheet, which served as a disincentive to promote a program.

About five years ago, there was a conceptual shift among efficiency professionals, who began to look for ways to design programs that would rely on outside financing, with the utility serving as the mechanism for accepting payments. The belief was that sticking with a utility to handle the transaction would make repayment easier for customers; and that the threat of shutoff for nonpayment might also improve repayment rates, said Steve Cowell, CEO of Conservation Services Group, whose company delivers energy efficiency and clean energy programs nationwide.

“Where you’ve got the ingredients of utilities that can handle it administratively and the right regulatory support system, [on-bill] can be a way of reducing the barriers out there,” said Cowell, whose company provides operational support for the programs in Oregon and elsewhere and lobbied for passage of the New York legislation. “We don’t know yet how it will translate into reduced risk and therefore reduced interest rates. The data is not there to make any claims.”
A program run by Midwest Energy, a cooperative utility based in Hays, Kansas, has found that customers value on-bill over alternative financing models, primarily because a project’s energy savings and the cost of obtaining those savings appear on one bill.

“With other types of EE [energy efficiency] loan projects, there is a logical disconnect between where the energy savings appear and where the investment in efficiency is paid for,” said Michael Volcker, director of regulatory and energy services at Midwest Energy, in an email message.

Since July 2007, the utility has offered financing to customers to make retrofits through the program, known as How$mart. The project went service-area wide in September 2008, and approximately 650 projects have been completed so far. Feedback has shown that customer satisfaction and value perception of Midwest Energy is higher among those who have gone through the program than the utility’s general customer population. “We are customer owned. Increased satisfaction means everything,” said Volcker.

Midwest Energy is responsible for paying back any money borrowed to finance the energy improvements. The utility has been able to access low- or zero-cost funding on behalf of program participants for more than half of the projects completed, said Volcker.

Utilities participating in the New York program—like those in Oregon—will offer on-bill recovery services, not on-bill financing as in Kansas and Kentucky, because the loans are not being issued and funded on the utility’s balance sheet. The plan is to tap a $51 million portion of the proceeds New York has obtained through the sale of carbon credits from the Regional Greenhouse Gas Initiative to provide financing through a revolving loan fund for energy improvements, at a rate expected initially to be 2.99 percent for residential customers, said Jeff Pitkin, treasurer of NYSERDA. The state also plans to issue low-interest Qualified Energy Conservation Bonds (QECBs) to replenish the fund and create a loan-loss reserve fund with a portion of New York’s Better Buildings grant.

The broad objective is to devise a range of critical elements needed to attract secondary market support. This includes establishing a uniform program that, unlike most of the other on-bill programs in existence, will cover a large, diversified region and reach across multiple utility service areas, said Pitkin.

“I think one of the most important elements of the New York legislation is that it was created as a statewide program with a consistent set of standards,” said Pitkin. “I think it has the potential to be a very efficient and effective financing tool.”
Some have suggested that New York’s program—which, like a few others, will tie payments to the meter—creates the type of security that many had hoped would flow from a financing mechanism known as Property Assessed Clean Energy, or PACE, which was halted by federal authorities last year but had become popular among efficiency advocates because payments would be linked to an assessment on a property. Depending on how the final on-bill program takes shape there, if a property goes through foreclosure, there is the potential that the payments could still apply to a successor owner.
The hope is to be able to approach the capital markets with a minimum initial issuance of $25 million at the end of 2012, said Pitkin. Ultimately, being able to offer a rated security would broaden access to investors on a far larger scale, which is needed to truly catalyze the home retrofit market, he said.

In Oregon, Smith said program administrators would seek to make an initial sale of a portfolio of at least $12 million into the secondary market in 2012.
“The ultimate goal,” said Smith, “is to create competition among financial institutions, so that attractive financing options drive ongoing consumer demand at scale.”


The goal is to forge a one-stop approach,
thereby cutting through the paperwork and
reducing the timeline needed to secure
financing and carry out an energy retrofit.


Written by:  Rona Cohen