On-bill financing: Why isn't everybody doing it?

If someone told me they could improve the efficiency of my computer so that it operates quicker, at no extra cost to me, I can’t imagine I’d turn them away. Yet, the energy efficiency industry offers a similar option for homes and businesses and at least so far, consumers aren’t flocking to the programs.

On-bill financing gives customers the ability to finance energy efficiency improvements made to their homes and businesses at no upfront cost. Customers pay for the insulation, lighting, new heating system or other efficiency measure over extended terms on their monthly utility bills. Typically, the savings from the efficiency improvement offset the cost, so the customer sees no increase in the monthly utility bill. You get a building that uses less energy and yet experience no financial pain in doing so.

There is no catch here. It sounds like a good deal for the consumer and early reports indicate it is. So why aren’t consumers interested?

A new report by the American Council for an Energy-Efficient Economy takes a close look at 19 on-bill financing programs offered in 15 states.  In many cases, less than 1 percent of eligible customers choose to participate in these programs.

The concept is just beginning to take hold, so the problem may simply be lack of awareness, says Casey Bell, lead author of the report.

“The growth of these programs depends on a number of factors. We are seeing a trend where they are emerging in more states. While I profiled 19 programs, we found 31 in 20 different states. A lot of these programs are still new, and many are still in the pilot phase,” Bell said.

Indeed, when it comes to energy, it’s not easy convincing consumers to accept new ideas, even those that directly benefit them, as behavioral scientists made clear at an ACEEE-sponsored conference on energy use and behavior in Washington, DC earlier this month. Even if they read the brochure from their utility, watch a TV commercial and spot a sign on the bus, they still are slow to respond.  What does convince them? A chat with a neighbor who tried the program, a push by their church, community or social group, a direct knock on the door by a real live person.

So to improve participation levels, it may be matter of more utilities offering more on-bill financing programs and then being patient; it may take some time for participation to snowball.

Will this happen? Can you expect to see your utility offer on-bill financing any time soon? The ACEEE report points out various reasons utilities are hesitating. Not surprisingly, money is a big issue. Utilities see less opportunity to finance an on-bill program, especially now that government funds are dwindling.

Some of this pressure can be relieved by attracting more third-party capital to programs, according to the ACEEE report.  This approach has potential because investors perceive utility revenue as low risk; consumers tend to prioritize paying their utility bills, since non-payment leads to shutoff of service. So, some utilities are exploring the possibility of bundling program loans with other financial products and creating a secondary market for capital.

“There is a lot of opportunity to learn from experience, and tapping into private sector sources of funding is likely critical for scalability,” Bell said.

In other instances, utilities finance on-bill programs through Community Development Financial Institutions or by leveraging government loan through agencies like the USDA’s Rural Utility Service.

So it’s going to take some experiment and innovation for on-bill financing to achieve scale. As if often the case, financial innovation is as game changing as technological advancement. We may have the smart boxes to revolutionize the way we use energy, but if utilities and consumers can’t pay for them, they offer little good.

The solar energy sector provides a good example. For years we saw little installation of solar panels on commercial buildings, despite enormous information produced by the industry about solar’s value. Then, entrepreneurs in the last decade came up with the idea of solar leasing and solar power purchase agreements. As a direct result, solar panels began sprouting on the roof tops of stores, car dealerships, office buildings and other commercial enterprises.  The lesson? In our contemporary energy economy, promise finally leads to practice – when the financing is right.

Elisa Wood is a long-time energy writer. Follow her on Facebook at Energy Efficiency Insights.

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Comment by James White on December 29, 2011 at 10:01am

I work for the conservation department at an electric utility.  One of the biggest advantages utility companies have with on-bill financing over conventional lending institutions is that we "have our customers by the meter" if they don't pay us back.  In other words, we can turn their power off if they don't make their loan payment.  The other advantage of on-bill financing is that the cost and benefit of the energy efficiency improvements show up on the bottom line of the utility bill. 

On-bill financing can also help solve the problem of getting energy efficiency improvements in rental properties.  Landlords are reluctant to spend money to improve the energy efficiency of their buildings because they typically do not pay the utility bills and do not get the direct benefit.  On-bill financing would put the cost and the benefits with the renter, while also enhancing the value of the property for the landlord.

Some banks may oppose on-bill financing by utility companies because they may feel that utilities are muscling in on their territory and competing with private lenders.  To prevent competing with private banks, many state laws will often limit a utility company's ability to make certain kinds of loans.  For example, in Washington state we cannot loan money for energy efficiency improvements to commercial businesses or for new home construction improvements.

We eliminated our residential conservation loan program a couple of years ago because of the administrative overhead.  Our loan program was not what I would consider on-bill financing, because we could not threaten to turn off their power if they failed to repay the loan.  We had to perform credit checks, place liens on the property and subordinate our loans whenever the customer refinanced their home or sold it.  We also were unable to collect if the customer filed bankruptcy.  I believe that many of those problems could have been avoided if we could have tied the loan to a specific utility meter that would automatically pass on to the next customer. 

Perhaps some others can comment on how their on-bill financing program works.  I assume that one of the aspects of on-bill financing is a formal mechanism for notifying a prospective home buyer or new renter that the electric or gas utility service has a loan obligation that must be repaid.

Comment by Steven Lewis on December 22, 2011 at 8:59am

I participate in a similar program in Kansas as a HVAC Dealer.  The biggest concern from the homeowner I hear is that if they move they have to pay it off in full or have the next homeowner assume the note (like that will happen lol)  So when they move they have to get financing to pay off the note from companies/banks that have much stricter criteria for the loan than the utilities.   

The homeowner is usually motivated to use the program when their equipment fails but the process is not fast enough for an immidiate problem.  I have several people who have used the program but it is usually 1 out of every 15-20 we inform about it.

If every one would plan ahead it would be better.   I tell people that I will never die since I am not planningon it so I will be able to keep repairing their equipment just as long as it lasts too.  LOL

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