Create a loan program to finance comprehensive energy efficiency services

Assumptions

• life cycle of energy efficiency improvements is 10 years
• Private or revenue bond financing is available to loan individuals at 6 percent
• Public startup and implementation costs are about $500,000
• Each participating household reduces its energy consumption by 10 percent
• Annual savings range represents 10 to 20 percent household participation

Analysis

A loan program to finance energy efficiency retrofits is cost-effective for the City, because administrative costs to leverage savings are low. Other cities have been able to access private financing to secure loans, and San Francisco could do this as well. This type of program would be more likely to yield customized, longer-term energy efficiency improvements than a rebate program — making this program a good pairing with the rebate programs provided through the Energy Watch program.

What we do now
Most public and utility-funded programs to assist energy customers with investing in energy efficiency focus on providing information and partial project financing. These programs usually cover specific measures and are limited by the amount of funding available. In recent years, however, program models have been developed that offer comprehensive energy services including audits, installation and verification of savings. These services are provided by energy service companies that guarantee specific savings levels. Because the energy savings are guaranteed, the efficiency projects can be treated as traditional investments with predictable rates of return. This guaranteed rate of return makes possible third party financing from such sources as private investors or a designated revolving loan fund. Complete project financing can then be provided, and eventually repaid through customer energy savings.

The advantage of this type of program is that consumers can pursue all economically feasible energy efficiency upgrades without the burden of providing the upfront investment capital. This allows for more customized and comprehensive energy savings than can be provided through rebates alone. Additionally, since all investment capital will be repaid through energy savings, there is a minimal burden on the public sector to fund energy efficiency.

What we could do
This t third party efficiency investment model is already being utilized in Cambridge, Mass. and Milwaukee. Both programs have secured private investment capital from sources such as local banks, pension funds and foundation grants. Either a public agency or independent nonprofit organization can be responsible for marketing the program and coordinating installation and funding.¹

In addition to private investment sources, San Francisco has the opportunity to use revenue bonds to fund the energy efficiency investments of local residents and businesses. Since the energy savings can be guaranteed and verified by local energy service companies, the City can be certain that the bonds will be paid off in full by participating customers through energy savings.

Cost
Working closely with an energy service company, each household would design a customized energy savings plan. A small loan would be taken out by the customer to cover the cost of investing in energy efficiency. After the efficiency improvements are installed, the household would enjoy the benefit of upgraded appliances and weatherization while the energy savings repay the efficiency loan.

For example, a household could afford a $1,270 efficiency loan if the upgrades saved at least 10 percent off the monthly energy bill.² Such reductions would have capital costs of about $44 million. costs to the City would be about $500,000 for the initial planning and development of the program. Annualized over 10 years, the cost is $50,000 per year.³

Carbon savings potential
If 10 percent of San Francisco households participated in such a program and each household reduced its energy usage by 10 percent, the city could reduce its annual greenhouse gas emissions by 16,747 tons, at the cost of $3 per ton.

If such a program is aggressively pursued and the participation rate is as high as 20 percent, the city could reduce its annual greenhouse gas emissions by 33,500 tons, with public costs through the life cycle of these investments of $1.50 per ton.

Endnotes
¹ For more information on The Cambridge Energy Alliance and Milwaukee Energy Efficiency, see www.cambridgeenergyalliance.org and www.cows.org/me2, respectively.
² If a household reduced energy use by 10 percent, it could pay off a $1,270 efficiency loan in 10 years through monthly payments of $14.11.
³ Milwaukee Energy Efficiency estimates that planning and implementation costs for a third party efficiency investment program to be $500,000.