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Energy Efficiency Is a Ripe Market for Small to Mid-Size Lenders

Small energy-efficiency lenders face major obstacles including a lack of customer demand and data, a shortage of standardization metrics, regulatory hurdles, and an absence of underwriting standards, according to a report from the Small Lender Energy Efficiency Convening (SLEEC).

The SLEEC took place in October 2013 when the American Council for an Energy-Efficient Economy (ACEEE) and Energi convened a group of key stakeholders to explore the obstacles small lenders face and to identify opportunities for small and mid-size lender engagement in the energy efficiency lending market.

This event resulted in a report, "Engaging Small to Mid-Size Lenders in the Market for Energy Efficiency Investment: Lessons Learned from the ACEEE Small Lender Energy Efficiency Convening (SLEEC)," which was published in February 2014.

The private sector can unlock more than $279 billion by investing in energy-efficient buildings, with $72 billion available in the commercial sector alone, the report said.

Yet growth in the energy efficiency market throughout recent years continues to fall short of this projection. While the majority of existing growth is a result of public-sector investment, growth due to private investment remains sluggish.

Small to mid-size lenders are well-equipped to open access to this market, particularly in the small commercial sector, the report said. Energy efficiency offers an important opportunity for small and mid-size lenders to differentiate their services from those of their larger competitors and maintain their position in local markets. Smaller regional lenders have key advantages: they understand similar local projects and can connect borrowers to local resources.

Facing Lender Obstacles

Report co-author and ACEEE senior economist and finance policy lead Casey Bell said the greatest challenge to attracting lenders to this space is effectively marketing energy efficiency and driving customer demand for financing energy efficiency investments. Many customers still need to be sold on the value of energy efficiency as an investment.

According to the report, ACEEE identified potential causes of insufficient demand, including the perception of high transaction costs, competition with other investments, lack of education on the availability and costs/benefits of energy-efficient products, and lack of adequate marketing for incentives.

To drive future demand, lenders that attended the workshop suggested benchmarking and disclosing energy efficiency and providing one-stop shops. Financial products alone will not drive energy efficiency projects. Marketing requires a customer base.

The commercial sector poses a particular challenge when it comes to cash flow validation. The report said participants at the convening recognized good building management may be a reliable indicator of whether a commercial customer will meet loan repayment requirements.

Lenders face some regulatory and reporting hurdles related to developing new financial products – many of which, according to the report, are a result of the risk-averse atmosphere created by the financial crisis.

Although some distrust exists between regulators and rating agencies, the report said lenders have identified risk-mitigating approaches to facilitate the creation of new financial products. Many lenders expressed the need for enhanced communication with regulators to familiarize them with these loan products and highlight the benefits associated with them.

Finally, in an effort to overcome slow uptake, some localized programs have attempted to redesign underwriting standards instead of complying with national standards. This may stem from lack of understanding of best practices. To resolve this, the report suggests that key players such as program designers and lenders should receive technical assistance including technical toolkits, continued stakeholder engagement and discussion, peer support, and data-sharing.

Engaging Lenders

According to Bell, the origin of SLEEC was based upon the belief energy efficiency represents a unique opportunity for small lenders. Furthermore, small business and commercial projects that fall within the $50,000 to $500,000 range pose a particular challenge to customers wishing to finance debt. ACEEE believed small lenders might be in a position to serve this traditionally "hard-to-reach market."

National Renewable Energy Laboratory, the United States Department of Energy (DOE), Argonne National Laboratory and Energi approached ACEEE to collaborate on a project to study these mid-size projects, Bell said. ACEEE saw this as an opportunity to invite well-positioned lenders to articulate their barriers to participating in the market and to highlight opportunities to address these barriers with policy, technical assistance, research, and private-sector product development.

Although the Federal Reserve System defines a small bank as an institution with assets of less than $1.16 billion, SLEEC organizers chose not to limit attendance based upon this parameter alone, Bell said. This is because lenders in this space may not always be banks but may often include government entities, utilities, community development financial institutions (CDFIs), credit unions, or other investors. For this reason, SLEEC guests were those entities that self-identified as small to mid-size lenders.

Bell said the pool of stakeholders included CDFIs, mission-driven green lenders, local community and regional banks, credit unions, small commercial entities linked through utility programs, and other commercial businesses and conventional local banks that are interested in entering the energy efficiency space.

Although perhaps motivated to expand their services for different reasons, many of these lenders share a competitive advantage over large financial institutions: they are members of local communities and have intimate knowledge of the actors and potential projects there as well as a willingness to invest on the local scale.

Validation of projected energy savings is expected to enhance lender engagement, according to the report. Lenders argue that in order for efficiency loans to be brought to scale, lenders and potential borrowers need to have confidence that projected energy savings will be realized.

Moving Forward

ACEEE plans to continue engaging stakeholders and focus on standardization and socialization, areas where currently further research and solutions are desired. According to Bell, some research has been done, but ACEEE "would love to make it more visible." Socialization around the benefits of energy efficiency is a key benefit of networking and engaging lenders peer-to-peer.

Bell said ACEEE plans to leverage the network to pilot solutions developed by DOE, the national labs, Energi, and other partners on the project. She said ACEEE also plans to pilot new standardization processes.

Through this hands-on approach, ACEEE and its partners can capture results and share them with other lenders. Bell said SLEEC also hopes to provide opportunities for lender-to-lender networking and develop resources to catalyze future small lender activity in this market.

Another important topic of discussion among many in this field is that of customer demand. Bell said one company providing leadership in this space is Shelton Group, a leading marketing communications firm that conducts market research on customer motivations for pursuing investments with a focus on sustainability and energy efficiency. Suzanne Shelton, CEO of Shelton Group, was the featured keynote speaker for ACEEE’s recent Energy Efficiency Finance Forum. Research such as this will most likely help to answer questions related to customer demand and the small business market.

Correction: A link to the ACEEE report was added to this story on May 16.

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