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Financing Household Energy Efficiency

Mark Ohrenschall
Con.Web, January 30, 2003

BPA Initiates Third-Party Loan Program for Residential Energy-Saving Measures

Bonneville Power Administration is initiating a loan program for residential energy-efficient equipment.

This new venture offers third-party financing to residential customers for a wide range of household energy-saving measures, such as heating/cooling systems, windows, duct-sealing and insulation. Utilities, local contractors and lender First Mutual Bank all have roles in this regionally available program.

BPA officials view the loan initiative as a way to expand residential energy efficiency opportunities at minimal cost to the financially strapped power marketing agency, which recently cut $13 million from its planned conservation spending. "The beauty of the loan program is that we're using the bank's money," said BPA's Mike Rose, and "tapping into a system" of existing residential equipment contractors.

"The key to this will be that the utilities will be encouraging energy efficiency through a base of contractors in their service area," said Scott Harlan, residential lending senior vice president for Bellevue, WA-based First Mutual.

His bank will offer unsecured loans of up to $20,000 and 12-year terms--at fixed interest rates starting at about 9 percent--for most residential efficiency measures eligible for BPA's conservation/renewables wholesale rate discount as endorsed by the Regional Technical Forum.

Mike Weedall's Brainchild

The residential loan program is the brainchild of BPA energy efficiency vice president Mike Weedall, who oversaw a similar venture in his previous work at Sacramento Municipal Utility District (see below for more on SMUD's program).

Weedall described the SMUD loan initiative as "tremendously successful ... We'd offer a loan or a rebate and invariably people would take the loan; it was that much of a better deal. The contractors loved it," he told Con.WEB, as it helped them sell high-efficiency equipment, such as air conditioning for Sacramento's toasty summer climate. "I've got to think we can have the same opportunities up here for things like high-efficiency heating equipment."

Weedall took charge of BPA's energy efficiency unit in late 2001, shortly after Bonneville administrator Steve Wright called for stabilized Northwest conservation funding (see Con.WEB, Sept. 28, 2001). "Part of Mike's challenge was how do we find ways to keep conservation alive that aren't necessarily subject to volatile market prices and the funding/lack of funding cycles that we go through," said Rose. The residential loan program is "one of a group of tools Mike's testing right now to help find ways to actually get us off the roller coaster."

This initiative also fits with several other guiding principles for BPA's energy efficiency activities, including cost-effectiveness, new approaches, collaboration and leveraging.

Loan Program

Bonneville can't loan money, Rose noted. And even if it could, "We're far better off relying on the banks to do what they do."

The agency sought utility opinions on the loan venture's design, Rose said, and solicited proposals from vendor-based lenders around the country, ultimately selecting First Mutual.

First Mutual began contractor-based home improvement lending in 1997, Harlan said, and now offers this service in 32 states. It makes hundreds of such loans per month, for items including energy-efficient windows and heating/cooling systems. "The contractors' participation in the program is a critical part of making it work, and ... we already had a contractor referral program," he said. "We saw a good opportunity there to have our program work in conjunction with BPA's."

Under the Bonneville initiative First Mutual will provide unsecured loans of up to $20,000, for terms as long as 12 years. Interest rates begin at 8.99 percent, as of late January, Harlan said, and can be higher depending on the borrower's credit rating, loan amount and other factors.

Most RTF-endorsed residential energy-saving measures are eligible for loans, although Rose said the program is intended for items that "typically become a part of the house," such as windows, heat pumps and insulation. Dwellings, ranging from single-family to four-plexes, can be heated by electricity or natural gas.

The loan program is available for all Northwest utilities, including investor-owned utilities. Equipment contractors anywhere can work separately with First Mutual, Harlan acknowledged, but the BPA venture offers the promise of utility referrals from customers. "A lot of conservation measures, a lot of improvements should come about because of that whole marketing relationship between the utility and the contractor," he said.

Participating utilities agree to local promotion and coordination with First Mutual. Utilities can feature certain measures, collaborate with local contractors and complement other energy-saving programs, including BPA's conservation/renewables rate discount. Other potential sweeteners include rebates and tax credits.

BPA is looking into marketing and advertising options that "leverage a little bit of [BPA] money" into considerable exposure, said Rose. Bonneville also may occasionally step in to provide program services, if needed.

The agency hasn't established program targets. "At this point, our immediate goals are really getting the program established well enough, getting it functionally operating and getting it out and available," said Rose.

Utility Viewpoints

Although no utilities have officially signed up for this new venture as of late January, a number have expressed interest, Rose said.

"We're very interested for some of our higher-cost measures, those that are not cost-effective for us to do that customers really like," said assistant energy services manager Dalene Moore of Tacoma Power. "We're thinking for window-only jobs it might be appropriate for our weatherization contractors to use third-party financing." Heat pump installations are another possibility for Tacoma, which already offers zero-interest weatherization loans. Local contractors could decide whether they wanted to participate with First Mutual, she said. The interest rate is "pretty low" for an unsecured loan.

The loan program idea appeals to energy services manager Jim Dolan of Pacific County PUD, who called it "another option" to help customers. But Pacific is deferring a decision on participation as it reviews its overall energy-saving portfolio. "My budget was cut in half for the 2003 calendar year," he said. "Now we're looking at dropping some programs that would've looked perfect for the loans."

Idaho Power is "definitely interested" in BPA's loan program, as it examines financing options for residential energy efficiency, said program specialist Annie Tucher. "I really think the BPA is on the right track with trying to bring a program to fruition that program managers like me can check a few boxes, customize for our customers and move on out the door. I think it's a really great idea, a great resource." Customers could potentially choose from among several loan-eligible measures, and thus create larger energy-saving projects, she said.

SMUD's Loan Experience

Sacramento Municipal Utility District, where Weedall formerly worked as energy services manager, began offering customer loans in the mid-1980s, said energy efficiency programs supervisor Dave Galbraith. Lending "really ramped up" starting around 1990, he told Con.WEB. SMUD has since provided some $400 million in financing, almost entirely for residential energy efficiency. From 1992 through 2001 loan-financed measures have created annual savings of 25 megawatts to 30 MW, and cut summer peak loads by 10 MW to 14 MW.

SMUD lends the money from its general revenues, a novel approach for utility loan programs, according to Galbraith. The northern California public-power utility works through participating contractors, who are authorized to make financing available directly to customers, which he called "a huge marketing advantage over anyone else." Contractors very much like the program features, he said.

The most popular measures are HVAC systems, particularly air conditioning, and windows, which now account for more than half of total loan volume, Galbraith said. HVAC loans average about $5,600 and window loans average slightly more than $7,000. Maximum term is 10 years for most measures. (See SMUD's Residential Equipment Efficiency Improvement Program for more details.)

Interest rates are set to cover administrative costs and projected losses, he said. Rates have varied over the years, from 3 percent to nearly 10 percent. So have delinquency rates, now about 2 percent but in the mid-1990s about 12 percent to 13 percent. "We started paying very close attention to qualifying borrowers" and became "aggressive on the collection side," Galbraith said (SMUD loans are collateralized). "There's no recipe out there for success, necessarily," he said. "Try it in the marketplace and see how it goes, then make your modifications as you go."

More Information:

Related Sites:
BPA's Financial Choices process (including Steve Wright's Nov. 22 letter)

Mark Ohrenschall
Financing Household Energy Efficiency
Con.Web - January 30, 2003

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