I Thought This Was a National Energy Crisis!
Innovating finance and marketing as if it is
by Mark Braly

Can I interest anyone in a $280 billion stimulus package for renewable energy and efficiency that won't increase the federal deficit?

It could be more. It would come from property owners who invest in solar and efficiency upgrades using long-term (as much as 25 years) low-interest financing paid back monthly on their property tax bills. The initial capital is from the sale of municipal bonds.

Pioneered in famously green Berkeley, CA, the program just completed its first two solar photovoltaic installations, and there are 36 homeowners in line for available funding and another 20 on the waiting list. Gail Feldman, the city's sustainable energy programs manager, expects to go back to city council for authorization to get additional funds in the fall when phase one is complete.

Boulder County, CO, is presently briefing installers about its program, which it hopes to launch by mid-year. The biggest city so far to announce its program is San Diego. In Palm Desert, CA, with its 130 degree summers some 200 loans are out with 52 solar systems installed using city general funds, but the demand is so high the city plans to sell bonds to its redevelopment agency. They would go to the bond market if tax exempt bonds could be used for this purpose. Due to IRS rules, only taxable bonds can now be used. Even so it's a good deal for borrowers, but it would be even better if Palm Desert, Berkeley and other advocates succeed in changing the rule.

Sixty or more local governments are at some point in implementing their programs, according to Cisco DeDvries, president of Renewable Funding in Oakland, CA. DeVries says that "it's gone viral."

DeVries, who was formerly Mayor Tom Bates' chief of staff in Berkeley, conceived the idea while he was putting together community assessment districts for undergrounding utilities. He realized that every state has a law that permits local governments to organize tax assessment districts for neighborhoods to pay for any number of public improvements that benefit and are paid for by the residents of just that neighborhood.

His new wrinkle was that the district could consist of individual homeowners who may not be neighbors but would want to voluntarily join the district to gain access to the financing. This required a minor change in California state law enacted in AB-811, which became effective at the first of the year. Oregon and several other states have enacted or are considering similar changes.

"There was some self-interest involved," DeVries admits. "I was getting solar bids for my house. It was a lot of money. I didn't know how long I would live in the house. It would be a big hit on my equity line of credit potential. Interest rates were high. I thought, there has got to be a better way to pay for this; so I brought in some really smart people to help e figure it out."

One was Chris Lynch, the city's bond counsel. Lynch told me that 1986 IRS rule prevents use of tax-exempt bonds for individual private benefit. A change in the rule, which would create a bigger market for the bonds and better rates for borrowers. Currently the typical rate is 7%. DeVries and his allies were successful in getting language into the big stimulus bill just signed that allows homeowners who get this financing to also be eligible for the new 30% federal tax credit. Interest on the loan is also tax deductible.

DeVries' firm, Renewable Funding offers a turn-key program to local governments who want to get into this. Facing a grim municipal bond market, they've even developed micro-municipal bonds that they would sell to individual investors, especially socially-conscious ones. The muni market isn't interested in $30,000 bonds, but the small investor market appears limitless for the microbonds with secure revenue streams, says DeVries.

For now, Renewable Funding is buying and holding the bonds. A quasi State of California bond-issuing agency representing all of the cities and counties in the state is studying aggregating the clean energy municipal bonds for the conventional bond market.

The $280 billion figure comes from a study done by Kammen's UC Berkeley group and published in Environment Magazine, which assumes a 15% penetration of residential buildings in the U.S. with efficiency and solar upgrades. (Both Berkeley and San Diego, however, include small businesses.)

"The issue is fairly simple," said DeVries. "If you had to buy 20 years of cell phone minutes when you buy a cell phone, no one would have cell phones. But (solar advocates) are asking people to buy 20 years of electricity in advance. People are not going to do it. They don't have the money. It violates the basic principle of buying things as you need them. We buy energy on a monthly basis."

As persuasive as that argument might be, the UC Berkeley model shows that the annual cost of solar photovoltaic power at today's prices is marginal even with this kind of favorable financing and tax breaks. The model showed that solar had a net present value over the term of the loan of just $87. And even that required the attractive California incentives. The energy efficiency investment looked better with a net present value of $1,738.

But to get to these dismal results you have to assume that conventional energy prices will be fairly stable over the next 25 years. I don't. Remarkably, the federal Energy Information Administration assumes they won't increase by more than inflation. The Berkeley model's most radical assumption was 4% above inflation, but the authors' note that this was close to the annual electricity price rise the U.S. has seen since 2001. Natural gas prices rose more, 8.4% a year.

But even with these projections everything looks better if you put a value of $30 per ton on the carbon avoided — an estimated one gigaton of CO2 if the 15% market penetration is reached, about 4% of what would be needed to reach 1990 emission levels by 2020. That's projecting California's AB32 goal to the whole country.

I asked the much-quoted Dan Kammen, professor in the energy and resources group at UC Berkeley and a co-author of the Environment magazine piece, where the homeowner might get cash for his carbon reduction. "What I'd like to see is money from the proceeds of the proposed cap and trade program be used to reimburse the homeowner for part of his investment," he said.

In any case, Kammen thinks the Obama Administration's stimulus program will include a $1 billion property owner loan program. Could this be up and running any time soon? Kammen notes that his former colleague at Berkeley, Secretary of Energy Stephen Chu, has committed himself to a plan to get all green energy money out faster.

Kammen thinks that an important aspect of the municipal clean energy financing and possibly the coming federal loan program is that they "remove a barrier between financing solar and energy efficiency. You can do both with one block of money."

But, for now, solar and much of the energy efficiency upgrades available are not a compelling investment for most people in most places. Even with this innovative financing we are still looking at the current market of motivated consumers who want to do their part to change the nation's energy future and won't be looking that closely at net present value and dubious projections of energy costs.

But that market is largely untapped, deVries figures: "Nine out of 10 people who get bids for rooftop solar don't buy it. It's too expensive, and they think they might sell the home. If we can increase this to 5 out of 10 with just the financing, we've got work."

And solar is getting cheaper, and, as its market and competition grows, it will get cheaper faster, along with a growing variety of energy efficiency investments.

Aside from first cost, however, there are other barriers to the homeowner solar investment. A big one, says deVries, is information.

I hear him talking. I won't presume anybody read an earlier column on my adventures in the marketplace for solar and efficiency improvements, so here is the link. To sum it up, if someone wants to go beyond compact fluorescent light bulbs and insulation, and invest some real money in efficiency upgrades, you're on your own.

What are the most efficient and reliable products on the market? What is your best deal? Who are the best installers? If I wait a year or two, what's coming along. Will my HVAC guy know or just pretend to know? Does the clerk at Home Depot know what and on what aisle the best available window retrofits are? Even insulation: How much? What kind? What about radiant barriers?

Pacific Gas and Electric, which serves northern California, offers no customized services to homeowners because there are too many of us and we're not cost effective. What they have to offer is on-line and raises more questions than it answers. For example, they recommend whole house fans in my climate zone and suggest it might save as much as 90% of my cooling costs. And yet the only guidance to picking a fan is a list of dozens of manufacturers and models, not even linked to webpages. The research would take weeks and would make me the whole fan expert in my town. Even for the retired, it's too much to expect. So you go to the yellow pages where the first guy you call never heard of a fan that would seal itself up when not in use so as not to leave a big leaking hole in your ceiling even through they exist.

I thought this was a national crisis.

The easy long-term, low-cost financing is not nearly enough. Information is also a high barrier, says DeVries — and so do I, for that matter.

What is needed is a one-stop climate action consumer center that would do on-site energy audits; offer free weatherization low-income individuals; know about, perhaps even demonstrate, the clean energy products on the market or the ones coming, the permits needed, the financing, the tax incentives and the installers; put on do-it-yourself workshops and much more.

And here's a big upside: It could aggregate buyers to fetch lower prices — make markets. Most solar installers I've talked to say that marketing is the biggest part of the price they charge. Most cities seem to fear the liability exposure of giving borrowers too much guidance on what to buy. One who doesn't is Patrick Conlon, Palm Desert's energy management director. He says that city's program finances highly efficient air conditioners as much as solar because for now they are a better deal.

"Most of installers are okay, but some of them want to install the biggest solar system the roof will support. I tell the homeowners they'll save $3 on a 13-to-18 SEER new AC compared to every $1 they save with solar," says Conlon. But in that heat, both have an excellent paybacks — 3 to 8 years.

It is not obvious that there is a business case for such an entity, which would probably be a non-profit. But I'd like one for Davis. Revenue could come from administration fees of the municipal bond financing program, energy audits, low-income weatherization grants, and a variety of green energy funding that is available from utilities, state governments, or coming out of the federal government.

Fundamentally, it's about innovation, and not just in technology. Like Cisco DeVries, President Obama and others in his administration do seem to get that.
 

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