December 6, 2012

What is On-Bill Financing?

On-bill financing refers to a type of loan available to property owners to help pay for the high upfront costs associated with energy efficiency and renewable energy upgrades. Whereas PACE loans are repaidthrough assessments added toproperty tax bills, on-bill loans get repaid through charges added to the borrower’s utility bill. Ideally, on-bill loans are structured in such a way that borrowers'energy savings offset their increased monthly debt obligations.

Utility Involvement and On-Bill Funding Sources

Similar to PACE, on-bill finance programs typically rely on state legislation--either by requiring utilities to contribute funds to the program or, in the alternative, by opening up their billing systems for program use. Due to their unique relationships with customers, the theory goes, utilities are well-positioned to collect loan payments and promote the program benefits.

However, a 2011 ACEE report concludes that utilities often resist participating in on-bill programs, as they don’t want the hassle of dealing with consumer lending laws. A way around these regulations, though, is to have the utility perform the upgrades and add service charges to their customers’ bills. Such tariffs are not considered “loans” and, thus, aren’t subject to state consumer lending laws.

In addition to utility contributions, there are a plethora of other funding sources ranging from the elementary to the sophisticated. On one end of the spectrum, numerous on-bill programs have received ARRA grants to establish revolving loan funds. On the other end, some municipal governments have issued energy bonds to establish loan-loss reserves, which were used to attract private investors to the program. Other funding options include:

  • State Rate Payers;
  • Private Foundation Grants; and
  • Proceeds from Cap and Trade Programs.

What should property owners know about on-bill repayment?

The loan amount and the repayment terms are determined by the estimated monthly savings from the energy retrofit. To determine energy savings, some programs require two energy audits--one to identify energy-saving opportunities and another to validate that the target reductions were indeed met.

Unlike PACE, though, on-bill financing loans are usually unsecured, meaning the borrower doesn’t have to pledge collateral. Since unsecured loans are riskier for lenders, on-bill programs require a more rigorous application process to determine one’s creditworthiness. However, lenders find some comfort in the fact that loan repayment is tied to a utility account, and most customers prioritize paying utility bills to avoid interruptions in their power supply.

Finally, on-bill programs are mixed as to whether loans are transferable, meaning the “loan follows the meter.” Some programs require borrows to assume personal responsibility, so that the entire debt obligation must be repaid at transfer of the property.

Yet others tie the debt obligation to the meter, not the current owner. This option is particularly attractive for owners of rental properties. Although a long-term contract is usually required, landlords can have energy upgrades completed without incurring any upfront costs while the tenants pay for it via their utility bills. If done correctly, the monthly utility costs should be equal to like sized units on the market.  The tenant enjoys the benefits of the upgrade--improved comfort, indoor air quality, etc.-- without paying more for heating and cooling than they otherwise would have if they rented a  non-efficient office or apartment.