The question of whether energy efficiency finance has finally arrived in scale was a major point of discussion at the 2014 ACEEE Energy Efficiency Finance Forum on May 11-13 in Washington, DC. Both the opening plenary and a breakout session on securitization explored this issue.
It appears that the energy efficiency finance industry is now expanding and gaining traction and resembles how the residential solar industry looked a few years ago. - the process of taking assets and converting them into securities for market transactions - is an important part of this shift.
According to Cisco DeVries, president and CEO of Renewable Funding, the residential energy efficiency market is really a home energy improvement market. Its value is over $40 billion per year. He said it is important to consider “how to capture those decision moments” when a homeowner is calling a contractor to replace a piece of equipment such as an HVAC system.
Is Energy Efficiency Finance Poised for Dramatic Growth?
DeVries said the foundation for a new asset class has been built. He said companies can start to capture a large portion of the $40 billion annual market during the next couple of years now that the first deals have been structured.
Also, DeVries said, the small early-stage energy efficiency loans will continue to provide data to financiers and developers, providing more payment data and allowing more traditional investors and institutions to jump on board.
Bruce Schlein, vice president of corporate sustainability at Citibank, said his company has recently helped the industry build scale by structuring two securitized transactions with Renewable Funding and Kilowatt Financial, using two distinct structures.
Dan Pillemer, chairman and CEO of Kilowatt Financial, said his company is providing up to 12-year unsecured residential energy efficiency loans nationwide. Similarly, DeVries said Renewable Funding is offering up to a 10-year term on its Pennsylvania and Kentucky energy efficiency loans.
Kilowatt Financial was able to create a pooled-asset special purpose vehicle with the assets going into a securitization trust. Then the company sliced the trust into tranches with different ratings, such as AAA and AA. Citibank was then able to package these tranches and sell them into the securitization market for investors.
Are There Adequate Data?
As the solar securitization market experienced earlier, the energy efficiency market has a lack of adequate data showing payment history for these types of loan products. Since energy efficiency and solar loans are extremely new in comparison to home and car loans (which have decades of data), many rating agencies and potential institutional investors are reluctant to rate or invest in these new asset classes.
While there are now payment history data streaming in about solar loans and to a lesser degree about energy efficiency loans, these data only come from a very short period of time. That doesn’t allow analysts to see how the programs react to changing economic cycles, which is key from a rating and investment perspective.
The importance of payment performance data and their value is evident in Renewable Funding’s partnership with the State of Pennsylvania, which allowed Renewable Funding to gain access to the Pennsylvania energy efficiency loan portfolio history. Some of these loans had 10 years of repayment history. DeVries said this data access was extremely helpful in bonding and rating.
Kilowatt Financial has discovered its current knowledge of consumer credit reveals a high FICO score is not the only indicator of ability to adequately support an energy efficiency loan, according to Marshal Salant, managing director and head of alternative energy finance at Citibank. The data showed a FICO score of 650 could be superior to a FICO score of 720. This analysis provides important information for rating agencies and banks.
Chuck Weilamann, senior vice president at Dominion Rating Service, and Jeff Pitkin, treasurer at New York State Energy Research and Development Authority (NYSERDA), both said more payment history information about energy efficiency loans is crucial.
Weilamann said there are not good comparable examples available for 10-20 year unsecured loans of this type. For property-assessed clean energy and on-bill financing programs, there are comparable products with extensive utility bill and property tax payments.
Pitkin discussed how the lack of data affects ratings from another angle. When NYSERDA tried to create a loan loss reserve fund as a credit enhancement option for efficiency loans, he said, the organization discovered that even with extraordinary levels of reserves, the rating remained low. In the end, the payment history of the loan holder was key to getting a higher rating.
How Can Commercial Properties Be Included?
“Multi-family and commercial are still toughest to finance because each lender needs to know exactly who is going to pay back the loan,” said Salant. He also said with “single family we can pool together and sell projects into the securitized market, yet it’s still hard to create these pooled assets.” This challenge was a common theme throughout the conference.
Many presenters discussed lack of clarity of loan ownership for commercial properties as being the major issue holding back the pooling of energy efficiency loans from commercial properties. Large amounts of capital have predominately been focused on the residential sector, where projects are traditionally smaller and have higher transaction costs.
From a transaction cost point of view, the installation costs and overall energy savings per square foot for commercial buildings should be cheaper than they are for residential ones, but the overarching issue of building ownership seems to be keeping these projects from obtaining scale and securitization.
According to the presenters, this isn’t an issue for the owner-occupied buildings that are common in smaller commercial settings, but the problem does affect larger commercial buildings that are owned by groups of investors.
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