WECC Financing Overview Wisconsin League of Municipalities September 2012

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1 WECC Financing Overview Wisconsin League of Municipalities September 2012 Todd Conkey Energy Finance Development Director

2 Executive Summary Financing is integral in greater market penetration and is needed to support programs that are required to achieve greater energy savings for existing building retrofit programs. They rely on different delivery mechanisms than mass market programs and require different program approaches to be effective. Customers would typically prefer building retrofits without loans; however they are a justified means to an end of obtaining a more comfortable and performing home. The need for financing products, their positioning in the market and their integration with various program approaches is critical.

3 Definition of Financing Financing is lending out money with the expectation of repayment of principal plus interest over a given time period. The key components include capital (money to lend), interest rate (function of risk) and time (how long to be repaid). Depending on risk a lender may need an enhancement to offer their capital. The enhancement may be a federal guarantee, various forms of collateral (secured) and/or equity (down payment) from the borrower. The more risk will dictate higher interest rates and generally shorter time frames for repayment.

4 Glossary of Key Terms FICO- Fair Isaac Credit Company, founded in 1956 as a tool to measure credit risk. Roughly 60% of people fall between 650 and 799 (1). There are three credit reporting bureaus: TransUnion, Experian and Equifax. Debt-to-Income Ratio- Total monthly debt obligations divided by gross monthly income. Typically less than 50% is preferred. Mortgage DTI is 28%, 36% DTI using housing plus reoccurring debt. Liquidity- Lenders need a secondary market to sell loan portfolios to access capital to continue lending and mitigate risk. Secured versus Unsecured Loan- A loan is secured if there is collateral (e.g. home, car) that a lender can access should the borrower default. An unsecured loan is solely on the borrower s ability to pay. Interest-rate-buydown- Providing a payment to the lender to lower the interest rate to the borrower. 1)

5 Glossary of Key Terms PACE- Property Assessed Clean Energy. Loan Loss Reserve- credit enhancement used in a portfolio approach. Debt Service Reserve- credit enhancement used in project financing. 1)

6 Financing Program Elements Target Markets Collections Funding Sources Servicing Finance Program Security (PACE Lien) WECC Partners Origination (EFS) Credit Enhancement (LLR, IRB)

7 Market Summary The potential market for energy efficiency retrofit activity is significant. Within this market there are numerous options for capital. According to a survey from Harvard University (1) about 14% of home improvement spending is energy-related improvements. This equated to $23 billion in spending. The breakdown of capital reflected 63% cash, 18% home equity and 12% personal or unsecured debt. The housing bubble changed this dynamic as home equity has been eroded and the national savings rate increased from 2008 staying over 4.00% until that last two quarters of 2011 (2). 7% 12% Home Improvement Spending 18% 63% Cash Home Equity Unsecured Debt Unknown 1. Source: Home Improvement Finance: Evidence from the 2001 Consumer Practices Survey Joint Center for Housing Studies, Harvard University. Guerrero (October 2003): 2. Source: GDP and the Economy, Swann:

8 Market Summary-Options Tools Collateral Rates Volume Benefit Disadvantage Actors Examples PACE Senior lien on property 3-6% 652- Babylon, NY, 160 Maine, 1,600-Sonoma County 1 Property financing FHFA stance Municipalities Maine (2 nd lien), Sonoma, Babylon Mortgage First lien on property 3.5%-4.00% 62% of U.S. own homes 2 Tried and true Property values and borrower capacity, 20-25% underwater Banks, realtors, title companies, secondary market Numerous Home Equity Second lien 4%-5% Historically high, last 4 years low Ease and tax benefit Lost home equity during recession Banks and credit unions Numerous Secured (nonproperty) Non-real estate 7%-9% Unsecured None 10%-14% March 2012 $804B revolving, $1,739B nonrevolving 3 Available, but not attractive Credit score driven Need equity Same, shorter term Banks, finance companies and credit unions Banks, finance companies and credit unions Numerous Numerous Credit Card None 14% plus Ease Not a longterm solution Banks Numerous 1) Source: PACE, OLR Research Report, McCarthy March 2012: 2) Source: US Homeownership Hits Decade Low, Jacobe, April 2012: 3) Source: Consumer Credit G.19, Board of Governors Federal Reserve, March 2012:

9 Market Summary Energy Efficiency Loans Uptake has been minimal, at best 1 Sacramento Municipal Utility District (SMUD) 24%, Connecticut Light & Power 8.2% of market while both operating over a decade. Most are under 1% of market (see next slide). Eligibility may reduce percentage High level of decline rates Many projects are reactive in the residential market Program bottlenecks (limited contractor base for example) Minimum program size and related value to potential lender partners 1) Source: What have we learned from Energy Efficiency Financing Programs?, ACEEE. Hayes. et al 2011:

10 Market Summary Energy Efficiency Loans -Selected Residential Program ( 1) # Loans Value Years Customer Base % of Market Per Year SMUD 142,000 $447.4M , % 4,176 Nebraska Energy Office 26, M 21 1,826, % 1,254 Southern California Gas 21, M 13 5,800, % 1,648 Keystone HELP 7,434 58M 4 5,567, % 1,859 Connecticut Home Energy Solutions 1, M 1 1,350, % 1,250 Oregon Clean Energy Fund M 28 1,676, % 4 Clean Energy Works Oregon M 2 823, % 250 Green Jobs Green New York , ,108, % 96 Minnesota Rental Energy Loan M , % 22 Minnesota Home Energy Loan 1, M 18 2,347, % 69 Butler Rural Electric M 37 11, % 5 Salem Electric Coop M 13 19, % 19 Santee Cooper (South Carolina) 5, M , % 205 Richland Energy Services (Wash.) 2,400 23M 20 21, % 120 Austin Energy 15, , % 586 1) Source: Borrowing to Save Energy An Assessment of Energy Efficiency Financing Program, Resources for the Future. Palmer. et al 2012:

11 Capital Sources New Market Tax Credits Rate- Payer Foundations Investors Fannie Mae Sponsors Environmental Fines Grants State Federal Bonds WECC Programs

12 Capital Sources State/Municipality bonding authority Has potential to secure large source of funds at lower cost of capital. Given the funds are to be paid back to the bondholders the ability to offer rebates or cover administrative costs are minimal. General Obligation Bonds- Strength of credit is the State, or municipalities, and are paid back from tax revenues. Most proceeds need to be for public support. Revenue Bonds- Revenue (source of repayment) comes from the underlying revenue-generating sources. Energy efficiency loans supported by a revenue bond would be a source, for example. Credit quality is based on the underlying revenue and can be enhanced by a loss reserve mechanism like a debt service reserve fund. Qualified Energy Conservation Bonds (QECB)- may be issued by state, local and tribal governments to fund energy efficiency conservation projects. A minimum of 70% of the state s allocation must go towards government purposes. They were originally used as tax credits but moved to a taxable coupon given to the investor who then receives a rebate from the Treasury department. The Treasury subsidizes the interest rate at 70% of the tax credit rate. Example: St. Louis County