On-Bill Repayment (OBR) for Energy Efficiency Upgrades – Will California Lead the Way?

Posted by Dalkia Solutions on Feb 14, 2012 11:12:33 AM

I spent last Wednesday at the California PUC in San Francisco participating in a workshop debating the merits of California’s newly proposed policy for utility on-bill repayment (OBR).  (Although being at the workshop necessitated my taking the Boston redeye that night (ugh) my spirits were lifted as I waited at SFO and watched Duke hoop’s last minute upset at UNC  – but I digress…)

My friend Brad Copithorne from the Environmental Defense Fund has been in the midst of developing this new OBR program and he had invited me to join these proceedings.  Take a look at some of Brad’s thoughts here.

OBR makes a ton of sense.  It’s a better version of the existing utility OBF program currently provided by PG&E, SoCal and SDG&E and several other leading utilities around the country.  While last year Groom Energy started talking to folks about how the DOE could spur the market by funding OBF, OBR looks like an even better solution.

With the current OBF model utilities loan capital to customers at low or no interest, funding their energy efficiency projects while gaining repayment through their existing billing relationship.  Monthly loan charges show up just as another line item on the customer’s regular invoice.  As most projects are fast payback, these three to five year OBF loans are cash flow positive from day one.

But the funding pool supporting OBF loans comes only from ratepayers.  As this capital gets allocated during slugfest utility/PUC negotiations (which have a lot more at stake) utilities are not positively biased toward OBF.  More fundamentally, as utilities are not chartered banks, lending is already outside their corporate charter.

Using the existing OBF model, CA utilities provided @ $32 million through 1,200 loans during 2011.

But CA policy makers know this amount is noise compared to the famous McKinsey 2008 estimate of $500+ billion needed to fund energy efficiency projects across the US.

So the new CA OBR framework proposes that outside bank/finance companies can enter the market, providing what could be unlimited loan capital for customer projects.  These bank/finance companies would fund projects upon their completion and have their loans repaid through the existing utility bill, like in OBF.  But here the utility operates just as the loan administrator, forwarding the customer’s monthly debt service payments back to the bank/finance companies (whose core business is making loans.)

While the debate on the details is still taking place (what happens if the utility itself goes bankrupt? are credit enhancements necessary for these loans? do the energy savings need to be guaranteed? etc.) it’s clear this model is already profoundly positive for two reasons:

  1. People pay their utility bills – even during the current recession utilities experienced less than a 1 percent default rate for their billings, versus @ 5% rate for more traditional small business lending.  Which means that although OBR is still new and “unproven”, long-term these types of loans are very bankable (meaning low cost and packageable.)
  2. Capital comes from professional sources.  These folks have a day job of assessing risk and loaning money to willing and bankable customers.  And this means that the loan terms can be longer, leading to “deeper” retrofit projects with longer, but still attractive and certain returns.  It also accommodates energy savings service contracts like our CESA.
One interesting, but complicated issue to watch is whether the utility (on behalf of the lender) will be able to disconnect service in the event of non-payment. Banks/finance companies know it provides them leverage, but doesn’t make them secure – their favored position.  Like PACE has its challenge with getting a senior position in the lending stack, this disconnect feature can be an emotional debate, especially for consumer advocates participating in these discussions.  But on the commercial/industrial side, the lender can feel better about this disconnect leverage, but also assess whether the building is likely to be occupied by a next tenant/owner, who would in turn inherit the obligation to pay.

So we’ll cross our fingers that the policy review goes well and California kicks off this new model, even if its not perfect.  And like other innovative, new energy related programs coming from the Golden State, we can expect to see it rolling out to other states across the US in the next couple of years.

Topics: CESA, On Bill Finance, Energy Savings Agreement, On Bill Repayment, OBR, PACE, OBF