How On-Bill Finance Innovates Energy Efficiency Investments

We need big and bold thinking at our national level to address climate change and grid resiliency.  Transactive energy is one example of that type of thinking.  Big and bold thinking also has to apply to financial innovations to build a Smart Grid.  One big idea is utility-based finance programs.  These programs could have significant impacts on reducing energy bills or carbon footprints and increasing dwelling comfort. Since utilities have relationships with almost all energy consumers, the costs of participation are lower than they would be for third party businesses.  And since buildings consume 36 percent of total energy use and 65 percent of electricity consumption, there’s sufficient motivation on the part of consumers, utilities, and governments to encourage creation of energy efficiency finance programs that can impact the greatest range of buildings.

On-bill financing (OBF) programs create opportunities for investor-owned, municipal, and coop utilities to offer financial assistance and help consumers reduce overall energy use.  OBF is a loan that is paid off in installments on a borrower’s utility bill.   It is usually tied to funding investments in new building insulation, windows, or other “big ticket” building retrofit activities that improve the building’s overall energy efficiency.

What motivates a utility to create an OBF program?  For the municipal utility based in Fort Collins, Colorado, reasons range from avoiding peak energy investments to achieving objectives in climate action plans for electricity and/or gas use reductions.  The utility also realized that OBF could augment existing building retrofit programs for residential customers.  And community interest turned out to be a powerful impetus to accelerate their OBF program from vision to reality.

John Phelan, Energy Manager for the City of Fort Collins utility shared some of his experiences in creating that OBF program.  As he described the history and the process, he emphasized that the biggest factor for success is the organizational will to succeed. That will to succeed is critical to overcome inertia (in the best of circumstances), or active resistance to change (in the worst of circumstances).  These forms of resistance can be found within utilities as well as external communities of stakeholders.  I’ll echo that based on my consulting experiences.  Change management – intelligently managing change by/of/and for the people – is the most important aspect of any project.

John noted, “OBF programs can’t happen without the active support of finance, legal, and billing departments.  Creating a ‘finance as a service’ mindset is a big lift for any utility, which traditionally doesn’t see itself in that light.”   Copy that.  But at one point in time, GM made cars.  Now it also makes loans for cars. As utilities transform their business models, some may consider that financial services offering could be one way to address declining electricity sales revenues.  This was not the motivation for the City of Fort Collins, but each utility could have a different approach.

An OBF program structure has some variability in terms of number of partners, and funding sources.  In the case of Fort Collins, the program looks like a mortgage application process, something that is familiar to homeowners.  The funding pool is the utility’s reserve funds so no outside capital is used.  Applicants are vetted through a third party partnership with a community financial organization serving as the process owner.  Loans are recorded in the county and appear as liens on the properties benefiting from the program.

The benefit of this approach is that the homeowner enjoys the immediate reduction in energy costs for heating and cooling, while the costs of upgrades are spread out over time.  Homeowners assume the OBF obligation while enjoying more comfortable residences, lowering energy bills, and reducing carbon footprints.  The default rates on OBF programs are low because people typically make utility bill payments a high priority – everyone likes to keep the lights on in their homes.

OBF is a creative way to give utility customers more choices in how they can reduce energy use, eliminates or postpones utility investments in additional generation, and improves building energy efficiencies.  That’s good for all of us.