Project Finance Mechanisms. Ceres roundtable participants recommended a variety of mechanisms to facilitate financing for energy retrofit loans. Among them are the continued use of property-assessed clean energy (PACE) and on-bill repayment (OBR) programs to create primary building loans for secondary market pools. Both mechanisms have merits and deficiencies:
PACE programs, which secure the energy retrofit loan by adding it to the local property tax lien, must be authorized at the state level and rolled out by local jurisdictions. While highly secure, PACE loans therefore can be slow to scale, although several programs are growing rapidly. In addition, PACE loans are primarily appropriate for commercial and industrial properties because Fannie Mae and Freddie Mac, the leading secondary market buyers of U.S. residential mortgages, refuse to participate in first-lien PACE programs.
OBR programs, which collect the energy retrofit loan through the local utility bill, can be used more broadly to finance residential, commercial and industrial retrofit loans. OBR loans enhance security to the retrofit lender by shutting off the borrower’s utilities in the event of default. One Ceres participant noted, however, that utility delinquency levels should be carefully evaluated in designing OBR programs.
Other recommendations included credit enhancements and master limited partnerships.
Credit enhancements: Participants in the Ceres roundtable recommended that credit enhancements be used to facilitate the pooling and securitization of building energy retrofit programs. Two forms of credit enhancement include loan loss reserves and loan guarantees. Loan guarantees are agreements to cover payments that are based on the credit of the guarantee issuer. Loan loss reserves set aside program funds to repay potential losses. Building energy retrofit programs in Oregon and Michigan use loan loss reserves.
Master limited partnerships: Master limited partnerships (MLPs) are publicly traded vehicles commonly used for energy-related projects, including oil and gas pipelines. The MLP structure is attractive to institutional investors in part because it provides exposure to real assets with the liquidity of investing in a publicly traded security, such as a stock or bond. Extending the MLP tax structure to efficiency projects could provide another channel to securing financing through the capital markets outside of pooled investments. Ceres roundtable participants note that Congress is already considering extending the MLP structure to renewable energy and energy efficiency projects; there is thus a near-term opportunity to make MLPs a tool for energy efficiency finance.
In addition to local PACE and OBR programs, state governments might prove to be efficient developers of building energy retrofit programs. The advantage to a statewide approach is the use of more uniform lending requirements, and the ability to more efficiently bundle loan pools for securitization. State pension plans are potential buyers for the securitized pools. Ceres' June 6 webinar will explore emerging directions in California on this front. And in a variant of this approach, local PACE and OBR programs potentially could provide loan product for state securitizations.
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