Budget Billing is an Untapped Opportunity to Finance Energy Retrofits
By: Steve Morgan
Tags: Housing, Energy Efficiency, Energy Finance

State and Local Policy

Budget Billing is an Untapped Opportunity to Finance Energy Retrofits

Energy savings performance contracting (ESPC or EPC), using utility cost savings to pay for the capital improvements that generate such savings, is common practice in the institutional sector (municipal, university, schools and hospitals, “MUSH”) and in public housing. ESPCs are popular for a good reason: while requiring little or no up-front capital investment, they are structured to be budget neutral, so that the cost of the financing is equal to or less than the utility cost savings. The upgrades are designed and delivered by a single company as a “turn-key” solution. Unfortunately, outside of the MUSH sector ($5 billion annually) and public housing ($1.3 billion), ESPC is rare and there is no effective energy-efficiency services marketplace. This is an opportunity for low-income housing that we can ill afford to miss.

Many low-income households are now participating in “budget billing,” in which the utility company bills a fixed monthly charge based on an estimate of the total consumption for the year. Additionally, millions of ratepayers belonging to electric cooperatives have enrolled in pre-paid billing, which is promoted by non-regulated utilities across the country, especially in rural areas. Many rural low-income customers elect pre-paid billing because no deposits is required to enroll and credit worthiness is ignored. Customers pay $50 or $100 on a regular basis.

Budget billing and pre-paid billing create an opportunity to deliver energy-efficiency upgrades at no extra cost to the customer. Their monthly billing could pay for utilities and for upgrades on a long-term financing basis, and their monthly utility savings would pay for the improvements.

ESPCs for budget-billing customers would increase the reach of energy-efficiency programs without new federal subsidies. ESPC options for budget-billing are attractive because they would reach many more people than existing energy-efficiency programs, such as the US Department of Energy’s Weatherization Assistance Program (WAP) and Low-Income Home Energy Assistance Program (LIHEAP). WAP, except during the ARRA years, never addressed as much as 1% of the eligible population, and can’t reach 1/10th of 1 % today. LIHEAP and WAP, along with state utility commission low-income utility programs collectively address less than 10% of the low-income energy burden. LIHEAP does provide assistance to 20% of eligible households, and utility bill assistance provides further aid. But the extraordinary potential of energy efficiency and renewable technologies is barely touched by the sum of federal, state and utility programs. From a cost-effectiveness standpoint, this proposal also makes eminent sense: It could secure better than $10 of investment for every $1 that WAP and LIHEAP grants can offer, and commensurate differences in savings and utility cost reductions.

But not everyone is enamored of using loans to pay for energy upgrades, and there are, certainly, practical challenges to overcome. Advocates for low-income households have long opposed using financing for their clients because they view debt service payments as unaffordable, savings as not guaranteed, and the risk of utility shut-offs as too great. Another challenge is the long time required to recoup the investment, which could be to a decade or longer. Lower-cost investments like appliances and lights would require shorter terms than more effective, but more costly, measures.

Although these challenges apply generally to expanding the ESPC model beyond MUSH and are by no means simple, programs focused on level-billing may make them more easily solved. A well-designed program might have these attributes:

Universally available to budget billing and pre-paid billing customers while mitigating financial risks for low-income customers. The likelihood that a comprehensive financing program can succeed is more feasible politically if it is not limited to low-income households. We believe the best prospects for major investments in low-income energy efficiency are tied ultimately to commitments made to building owners and occupants across the income spectrum. To protect low-income customers, ESPC programs should provide energy savings guarantees, provide utility allowance flexibility for HUD-assisted housing (to overcome the split incentive issue), and guarantee no utility service shut-offs. Sources of public funds for such protections may look something like the US Department of Agriculture’s current low-interest residential loan program. Smart packaging of energy efficiency and renewables to maximize savings available for financing. Increasing the cost savings available for financing makes it possible to provide more effective packages of upgrades. The potential for popular measures like community solar, for example, is significant in states that permit virtual net metering and provide incentives to low-income households, and would allow tenants to directly benefit from lower-cost electricity. One challenge is the structuring of incentives to facilitate energy-efficiency upgrades simultaneously. HUD has wisely anticipated this challenge in public housing and enabled ESPCs to capture the electric savings from solar and capitalize them in long-term financing to invest in energy-efficiency measures. Use repayment strategies to enable retrofits. How can we guarantee that debt service payments will continue for 10 or more years, during which time the original customer may move? This problem would be mitigated if the debt stays with the building — as PACE affords. On-bill repayment mechanisms, which this more closely resembles, must provide an option to be continued by new occupants (renters) or homeowners. Include robust behavioral interventions. Behavioral interventions are vitally important in all energy-efficiency programs; they are particularly important for any savings guarantee program, especially one focused on low-income households. Behavioral programs with frequent interventions and feedback can lower bills by 10–15% by themselves for active participants (pre-paid billing providers claim 5% savings). Principles of effective low-income behavioral programs are knowable, and installation contractors can be trained to provide the needed interventions. Aggregate demand to reduce implementation cost. While third-party energy services companies find it difficult to serve small buildings, the aggregation of many buildings in a neighborhood or small city, perhaps created through a city-utility partnership, can enable economies of scale sufficient to attract ESPC specialists. The knowledge that a large market exists could attract new entrants into the local ESPC market, as general contractors, and perhaps even WAP agencies can depend on having enough potential business to invest in learning a new service area. Larger markets with more players would benefit from ESPC programs through competition-driven lower costs. Provide credit enhancement to attract private investors. New business models always entail overcoming risk in attracting the private capital necessary to make them work. Although ESPC is a well-proven model in the MUSH and public housing sectors, investors and lenders may need additional protections for the residential market. Certainly, third-party performance guarantees help, but in order to mitigate the as-yet unknown default risk, it may be necessary to use public or philanthropic funds to provide credit enhancement, particular for low-income customers protected from utility cut-offs. Examples of intermediaries that combine philanthropic and market resources abound in affordable housing; perhaps it’s time to apply such a model more widely to energy financing to enable speedy creation of a robust market.

Even well-crafted, attractive financing programs are necessary, but not sufficient, to effect change on a significant scale. The nation lacks both a significant one-stop, comprehensive retrofit industry, and readily accessible financing. Nor are there demonstrated savings across residential neighborhoods, or commercial districts, or even for specific building types, including multifamily. Mandatory building standards and codes, accompanied by attractive financing programs and sufficient contractor infrastructure, should ideally apply to all buildings to secure the kind of investment levels needed to combat climate change and significantly alleviate low-income energy burdens. That kind of commitment probably awaits a national consensus to significantly address climate change. Accompanied by federal expansion of infrastructure spending to fuel the economy, fossil fuel pricing that incorporates social environmental externalities (again linked to climate change), technology improvements (e.g. LEDs, building controls), and more aggressive climate change mitigation policies can inspire the hundreds of billions of dollars in investments needed to address buildings, including low-income buildings.

State and local governments, however, have great latitude for programs and policies that set the stage for future national political consensus on climate action. The states have the authority to regulate utilities, establish low-interest loan programs, manage and facilitate energy performance contracting efforts in public buildings, enact PACE legislation, provide renewable energy incentives (including tax credits and community solar), and establish efficiency standards and financial incentives for housing finance agencies. States can also set building standards through stronger codes for all residential and commercial structures. Washington DC has already put such programs in place. Local governments can establish benchmarking mandates, opt-in to and administer PACE programs, establish zoning regulations to facilitate renewable technologies, and set housing policies to prioritize energy efficiency and resilience investments by developers and building owners.

Municipalities and states would be well-advised to explore ESPCs as a promising avenue to finance residential energy efficiency upgrades, including in low-income housing. To the extent that budget billing and pre-paid billing offer a no-pain opportunity to customers, the dividends could be a much greater reach than any existing low-income energy efficiency program.

This story was peer-reviewed by Lloyd Kass and edited by Bomee Jung and Tom Sahagian.