Effective Programs and Market Hurdles in On-Bill Energy Efficiency Financing

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1 Effective Programs and Market Hurdles in On-Bill Energy Efficiency Financing Peter Krajsa Chairman and CEO Laura Nelson Executive Vice President and CFO UPDATE 05/08/12

2 AFC First A National Leader in Energy Efficiency Lending and Programs Founded in 1947, AFC First s sole business is the management of contractor and sponsor driven energy improvement financing programs nationwide our primary focus since 1999 We pride ourselves in working in an effective and collaborative way to design and administer customer and contractor-friendly loan programs that achieve and surpass the sponsor s objectives both in term of loan volume as well as customer and contractor satisfaction We manage a national network of over 5,000 approved energy efficiency contractors and work with states, municipalities, utilities and equipment manufacturers to promote and develop financing programs

3 AFC First A National Leader in Home Energy Efficiency Lending and Programs We provide loans in all 50 states with flagship programs including: AFC First s National EnergyLoan National Power Saver Loan Program Pennsylvania s Keystone Home Energy Loan Program Connecticut s Solar Leasing Program Kentucky Home Performance Financing Greater Cincinnati Energy Alliance AlabamaWISE Richmond Regional Energy Alliance Efficiency Maine s PACE and PowerSaver programs Energize Delaware Financing Illinois On-Bill Energy Loan Connecticut On-Bill Energy Loan Hawaii On-Bill Energy Loan

4 AFC First A National Leader in Home Energy Efficiency Lending and Programs Named 2013 Alliance to Save Energy Andromeda Star of Energy Efficiency award winner Named 2013 State and Local Energy Report s Single Family program award winner Selected as one of the national pilot lenders for the U.S. DOE/HUD Power Saver loan program Designated by the US Department of Energy as the nation s first private, nonutility Home Performance with ENERGY STAR sponsor Appointed exclusive originator/servicer for WHEEL (Warehouse for Energy Efficiency Loans), the national secondary market program endorsed by the U.S. DOE and NASEO Organizing Green Energy Federal Credit Union Designated as a BPI Testing Center, we operate the Green Energy Training Center & Academy for both class room and on-line Home Performance, BPI and contractor sales training

5 The Facts About Financing for Energy Efficiency Engaged Contractors and Well Designed Financing Programs Drive Residential Energy Efficiency In the current Perfect Storm of Energy Cost crunch and Credit Contraction, consumers and contractors more than ever need simple financing options to make energy improvements 70% of all Home Improvements up to $15,000 are financed in one way or another, 90% of improvements greater than $15,000 are financed Contractors drive most of this demand Rebates and tax credits are great but where does the rest of the money come from? Keep it simple for contractor and consumer the goal is work performed and energy savings, not the number of audits conducted

6 Two Kinds of Energy Efficiency Customers Reactive Welcome to the Twilight Zone REACTIVE Consumer - Welcome to the Twilight Zone Typical urgent HVAC or home repair installations ($3,000 to $15,000) are the consumer s financing twilight zone - too big for a credit card, too small for a home equity loan The vast majority of energy efficiency improvements Customer doesn t want a lien on their home Time sensitive consumer needs work done ASAP Contractor-Driven Come-on or Teaser (0% for 6 months type) Financing is not the answer for a major capital purchase and can hurt contactor credibility Borrower typically wants longer term or lower rate than he can get from bank Solution: Unsecured point of purchase loan programs with (lower rates based on simple product qualification ENERGY STAR)

7 Two PROACTIVE Kinds of Energy Consumer Efficiency - The Thinker Customers Proactive The Thinker Whole house improvements are larger projects which generally require financing More project driven, less time sensitive Contractor is the expert More customer thought, engagement and foresight Borrower may not have adequate home equity for an loan Solution: Home Performance with ENERGY STAR model with Energy Audit, recommendations and lower rate than Reactive financing

8 On-Bill Financing/Repayment Overview On-Bill is not a magic bullet for consumer and contractor uptake of energy efficiency improvements, but it is a tremendous tool if properly designed and implemented Consumers and contractors will generally take the path of least resistance when it comes to financing - that means they may choose higher rates credit cards or even promotional or teaser financing programs (0% that turns into 27% if not paid off) if they are perceived as easier than on-bill Just being on the bill means very little to the consumer. True, it s one less monthly payment they have to make, but that alone is not a major driver Like any successful financing program, an on-bill program has to meet the needs of the market to get uptake Programs designed exclusively around hitting regulatory targets without taking into account consumer or contractor needs are likely to fail

9 On-Bill Financing/Repayment Plusses Consumers and Contractors Like the Transference of Credibility from a utility backed program Improves contractor close rates as customers are less likely to shop and actually make a purchase if they are dealing with a contractor associated with a utility program A fixed monthly payment being offset by projected energy savings can be more apparent in an on-bill program (especially if it is integrated into a contractor sales tool) Depending on program design and who is taking the credit risk, on-bill may be open to a wider market than traditional credit program or be able to offer lower than market interest rates or both

10 On-Bill Financing/Repayment Hurdles Complicated program design or qualifying improvements that are too finely tuned just to be meet regulatory goals reduce uptake It s hard to operate and market a consistent statewide program if different utilities within that state have different qualifying improvements (to meet regulatory goals) There is no secondary market capital currently available for on-bill programs meaning access to capital must be highly localized or one-off projects While utilities generally have low charge-offs they have higher monthly delinquency which is an anathema to capital providers where consistent monthly cash flow is king Programs have successfully addressed this issue by having the utilities guarantee the monthly flow of payment or back-stop credit losses with their own capital Integration of data systems across multiple utilities can be expensive and challenging

11 Illinois Energy Loan Program - On-Bill $12.5 million, 3-Year Program where utilities guarantee stream of payments to capital source and assume losses. Each utility responsible for $2.5 million. 1,400 loans and $7 million made through program first two years. ComEd, Ameren Illinois, Peoples Gas, North Shore Gas, Nicor Gas. AFC assembled the outside capital, manages the contractor network and originates loans and administers program. Each utility has its own qualifying measures some have had greater uptake than others because of this. Residential Loans $500 to $20,000, 4.99%, ten year terms, underwritten to modified national energy efficiency loan standards (minimum credit score 640, income verification only for loans above $4,000). Multi-Family and Small Business programs just coming on-line.

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15 Energize CT Heating Loan - On-Bill New program for CL&P and UI residential customers. AFC manages the contractor network and originates loans and administers program, with loan capital coming from utility SBC. Qualifying measures are ENERGY STAR heating systems for oil, electric, natural gas and propane. Loans to $15,000, 2.99%. Loan payment must be less than projected saving. Term is estimated payback plus 2 years and a minimum 10% down payment is required. Monthly payment and down payment are calculated using point of purchase mobile tool developed by AFC. (AFC worked with PSD to integrate Connecticut utility standards into our loan system). Only credit qualification is that customer must be current on electric bill.

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18 Hawaii Energy Bill $aver Program / On-Bill Finance Option True Innovation! Terms: Establishing a $20M Fund utilizing a combination of Public and Private Capital. Finalizing private capital, planning roll out shortly. Assumes approx. 2,400 projects at installed cost of $7,000, deployed over 24 months. Private capital likely to include a combination of debt and tax equity. Term not to exceed 12 years, aligned with useful life of measure program targeted toward solar hot water, heat pumps and EE. Public capital likely, in subordinate position and will bear repayment interruption or first losses.

19 Hawaii Energy Bill $aver Program / On-Bill Finance Option True Innovation! Use: Fund used to finance clean energy equipment on under-served residential and commercial properties, that will be owned by special purpose entity ( SPE ). SPE to own, maintain, operate and insure systems. Utility account repayment history will be used to qualify meter for financing. No underlying consumer credit or obligation think non recourse financing to the meter. Repayment: Repayment secured by utility meter-tied tariff obligations (On-Bill Obligations). On-Bill Obligations repaid as a charge on the utility bill and are senior to most other utility charges on the utility bill during delinquency and pari passu during default/disconnection.

20 Flow of Funds Purchase Price ($) Purchase Price ($) On-Bill Financing Fund/SPE (FPA: RF) Originator (FPA: AFC) Utility Customer/Contractor OBO Agreement OBO Agreement Monthly OBO Repayments Monthly OBO Charge on Utility Bill($) Trustee Monthly OBO Repayments Utility

21 (888) afcfirst.com Peter Krajsa Chairman and CEO ext 2685 John Hayes President and COO ext 2683 Laura Nelson Executive Vice President and CFO ext 2696 Ken Yeager VP - National Accounts kyeager@afcfirst.com (443) Bill Walsh Business Development Director wwalsh@afcfirst.com ext 2707 Ben Rainford VP of Production brainford@afcfirst.com ext 2732 Pat Stumpp VP - Senior Credit Officer pstumpp@afcfirst.com ext 2691 Tessa Shin Director of Programs tshin@afcfirst.com ext 2692