Warehouse for Energy Efficiency Loans Clears Significant Hurdle

By Chris Shreve

A new tool that could help states expand their energy efficiency loan programs is one step closer to becoming a reality. The Warehouse for Energy Efficiency Loans (WHEEL), which would purchase residential energy efficiency loans from state and local originators for sale into the secondary markets, has received the Department of Energy’s (DOE) blessing and could be ready to receive its first funds in the fall.

States have always faced an economy-of-scale challenge when trying to repackage energy efficiency loans for sale to secondary markets. Large financial institutions simply aren’t interested until the pool of loans is very large—larger than most states can accomplish on their own.

Enter WHEEL, a central warehouse where a number of states pool their loans for sale, freeing up resources to make more loans. The WHEEL model provides an alternative to the Fannie Mae program, which also purchases unsecured residential energy efficiency loans from state and local programs. Unlike Fannie Mae, however, WHEEL’s purchases are aggregated for sale onto the secondary markets with full disclosure of loan performance data. The data allows investors to assess the value of these portfolios, increasing the sources of capital and driving down capital costs in the longer term. This model has been used repeatedly and successfully in other areas of consumer lending, including auto loans and time-share properties.

To make energy efficiency loans more attractive to consumers, many states “buy down” interest rates, sometimes improving the rate by as much as 650 basis points, or 6.5%. The developers of WHEEL, including the Pennsylvania Treasury, the National Association of State Energy Officials, and the Energy Programs Consortium (EPC) wanted to create a model wherein states and other program sponsors can potentially recoup some of the funds spent buying down these loans if loan performance is good. But unlike a traditional interest rate buy-down, the WHEEL program provides the potential for an associated stream of revenue that can be recycled into the program or used for other purposes as desired by the sponsor. Thus, state and local sponsors can further buy down loan rates to consumers using a traditional interest rate buy-down approach if desired.

Early in the summer, the DOE ruled “the association of a potential revenue stream with an interest rate buy-down, in and of itself, does not alter the characterization of the use of funds as an interest rate buydown.” The DOE’s guidelines mean that participants may use Energy Efficiency and Conservation Block Grant (EECBG), State Energy Program (SEP), and American Recovery and Reinvestment Act (ARRA) funds to support loans sold into WHEEL, and that any associated revenue that flows back to participants will not be subject to DOE program and ARRA requirements.

Richard Kauffman, senior advisor to the Secretary of Energy, along with DOE staff, worked closely with program developers to tailor a structure that fit with the finance guidelines for the use of EECBG and SEP funds. “The development of WHEEL is an important milestone in creating a viable secondary market for residential energy efficiency loans,” said Kauffman. “WHEEL will allow state and local programs to achieve economies of scale, familiarize the markets with the performance of these loans, and drive down the cost of capital over time.”

According to Keith Welks, Pennsylvania’s deputy state treasurer for fiscal operations, and a key architect of WHEEL, the DOE guidance documents confirm that WHEEL can offer interested sponsors of residential energy efficiency loan programs a source of capital funding that combines the familiarity of an interest rate buy-down with the potential for return of collateral amounts that are ultimately unneeded to address loan losses.

“The WHEEL team believes that the DOE guidance removes the last significant obstacle to being able to offer an attractive vehicle to which loan program sponsors can sell their loans,” said Welks, adding that sponsors can now devise sustainable programs that deliver energy efficiency financing to homeowners. Welks launched just such a program, the Keystone Home Energy Loan Program, in his home state of Pennsylvania in 2006.

The WHEEL financing structure discussed above is based on the Pennsylvania model but allows participants to tailor the program to their own criteria, within certain broad limitations. (See the sidebar, “How WHEEL Works.”)

With the last significant hurdle passed, WHEEL is now actively engaging state and local governments that have shown interest in the structure. A webinar held on June 13 with WHEEL members Citi, EPC, the Pennsylvania Treasury, and Renewable Funding drew participants from a majority of states. In response to a number of requests, the WHEEL team is also exploring options for state and local governments interested in leveraging qualified energy conservation bonds with the WHEEL structure. Contract drafting is under way, and WHEEL may receive its first state and local funds as early as the fall of 2012.