WHEEL: What Do New York, Florida, Pennsylvania, and Kentucky Have in Common? Energy Efficiency as an Asset Class
by Susan Rosenthal and Elizabeth Bellis
The $40 Billion Energy Improvement Market
Energy improvement projects provide tremendous opportunity to capture both energy savings and economic benefits. With energy costs projected to continue to rise, the market is poised for robust and sustained growth. This $40 billion per year market includes routine reactive upgrades, such as the replacement of boilers and air-conditioning units; major upgrades, such as the installation of new windows, doors, and roofs; and proactive energy-efficient and renewable upgrades, such as the installation of solar systems. In the past, most homeowners were forced to finance these improvements either through home equity loans or high-interest consumer credit cards. The need for more affordable financing opportunities led states, local governments, and utilities to develop programs that offer low-interest financing for home energy efficiency improvements.
Pennsylvania Leads the Way
The concept for the Warehouse for Energy Efficiency Loans (WHEEL) emerged from the success of Pennsylvania’s Keystone Home Energy Loan Program (HELP), which began making loans in 2006 through a network of participating contractors. The Pennsylvania Treasury Department (Treasury) began the program expecting to hold loans to term. Volumes far exceeded expectations, however, and Keystone HELP grew from originating $5 million in loans in 2006 to originating more than $17 million in 2010. By the end of 2010 the program had issued more than $45 million in loans and was on pace to exhaust all available public funds. The Treasury realized that the only way to sustain and grow Keystone HELP was to seek an injection of private capital.
In 2010 the Energy Programs Consortium (EPC), in collaboration with the Pennsylvania Treasury and the National Association of State Energy Officials, began developing the WHEEL concept. While evaluating recapitalization options for the Keystone HELP program, Treasury saw that there was no functional secondary market for energy efficiency assets and that the development of a residential retrofit economy—which could potentially represent a $600 billion market sector—was dependent on the emergence of such a secondary market.
Fannie Mae was the only active purchaser of these types of loans in 2010, but it purchased the assets at a significant discount that did not align with Treasury’s loss experience on the loans. EPC and Treasury worked to design a platform that would enable state and local governments to leverage their public funds (such as State Energy Program and Energy Efficiency and Conservation Block Grant funds) to access large-scale private capital and institutional investors in capital markets. Initial funding to develop WHEEL was provided by the Ford, Rockefeller, Surdna, and Energy Foundations, as well as by the DOE.
The goal of WHEEL is to create a secondary market for residential clean energy loans in order to generate a virtually unlimited amount of lower-cost capital to state and local energy loan programs. WHEEL purchases unsecured residential energy efficiency loans from participating programs such as Pennsylvania’s Keystone HELP and Kentucky’s Home Performance loan program and bundles them into diversified pools to serve as collateral for rated asset-backed notes. WHEEL has received a shadow investment-grade rating from Fitch Ratings and plans to sell these notes to capital markets investors in 2015.
WHEEL can be modified to align with various regulatory requirements. For example, WHEEL can be tailored by states to capture, quantify, and aggregate residential energy efficiency savings as part of their compliance with reducing greenhouse gas emissions under the EPA’s Clean Power Plan (Section 111[d]).
WHEEL was officially launched in April 2014 with a $100 million line of credit from Citibank and the Pennsylvania Treasury. WHEEL was seeded initially with 1,500 loans from Keystone HELP totaling around $13 million. The Kentucky Home Performance program also joined WHEEL as a charter member. As of October 2014, the total value of loans purchased into the warehouse was around $20 million.
The project has caught the attention of not just the public-sector interests it was originally crafted to serve but also the mainstream media, receiving feature attention from The Atlantic and Huffington Post.
WHEEL is now attracting additional partners. On October 22, WHEEL was named as one of the seven initial transactions to be funded by the New York Green Bank, with the transaction expected to close by the end of 2015. Also in October 2014, Florida signed a Letter of Agreement to join the program. Negotiations are currently under way with several additional states.
How WHEEL Works
Utilizing private capital provided by Citibank and the Pennsylvanis Treasury, along with credit enhancement funds provided by state and local governments, utilities, and foundations, WHEEL is able to purchase a wide variety of energy efficiency and renewable loans and allows each sponsor to choose which types of loans it would like its funds to support. This flexibility allows WHEEL to partner well with preexisting loan programs operating around the country, without requiring significant modifications or additional effort for the sponsor to access additional capital. For example:
- WHEEL can purchase loans with terms of 3, 5, 7, or 10 years in amounts up to $15,000.
- A sponsor may choose to invest in each loan a standard “credit enhancement” percentage and consumers would be charged a flat rate (currently 9.99%, but expected to decrease after the first securitization), or the sponsor may choose to provide funds to buy down the interest rate to consumers for certain types of loans to help drive demand for specific categories of energy improvements. For example, a sponsor could buy down rates on whole-home project loans so that consumers pay as little as 0.99% interest on such loans, creating a “tiered” interest rate structure to encourage consumers to make more extensive upgrades (which may be the preferred choice from a policy perspective).
- A portion of each loan may be used for nonenergy improvements to the home, a feature that drives demand by allowing customers to use the product for a complete project rather than having to seek two sources of funds.
A sponsor may choose measures that can be financed in its program from a “menu” of available improvement options, such as water heater replacement, new windows, and wall and ceiling insulation.
In addition, a sponsor may choose to support loans made within a limited geographic region or to customers within specific demographic profiles.
- WHEEL was also designed so that the loan products are accessible to borrowers of all income levels. To balance the need for creditworthy borrowers with the importance of offering a loan product to consumers of all incomes, WHEEL is available to those with a minimum FICO score of 640 and offers the same loan terms to all borrowers.
As it grows, WHEEL is constantly evolving. The program is currently identifying opportunities to incorporate loans for energy efficiency–related resiliency measures and water conservation measures. EPC is also exploring whether a similar model could be used to develop a state-based approach to financing multifamily energy efficiency housing retrofits.
First WHEEL Securitization
The first securitization is expected to close in 2015. This will be a significant development for WHEEL and is expected to facilitate its expansion by enabling more efficient pricing that takes advantage of the current low interest rate environment. These developments should increase demand for loans in the participating programs, thus increasing the volume of loans entering the warehouse. This in turn will lead to more frequent rounds of successive securitization and more public data about the performance of the asset class. This should further reduce the perceived risk of the assets and increase liquidity, resulting in a lower cost of capital for WHEEL energy loans and creating a virtuous cycle of lower cost and greater demand, loan volume, and public loan performance data. The catalyzation of this virtuous cycle is one of the goals of the WHEEL project, and the WHEEL team is excited to share the progress that has been made toward the realization of this important goal.
Posted on: February 12th, 2015