like us 

Local Government Commission


Summer 2012


Scaling Up Energy Efficiency Financing in California

By Kelley McKanna, Renewable Funding

One of the great challenges in building the energy efficient upgrade market has been the high price tag. Many homeowners could be more comfortable and healthier, while saving money but are dissuaded by the hefty upfront cost. In one survey, 80% of California homeowners said that the cost prevented them from installing efficiency improvements.

The solar industry has tackled the upfront cost barrier by introducing solar leases and power purchase agreements (PPAs). Just three years ago, these types of financed solar systems represented just 11% of the market in California. Today, leases and PPAs represent almost 60% of all solar systems installed – and the overall solar market has grown by 150%.

Put simply, we need to bring new financing options to the market if the State has any hope of funding the $60 billion need to achieve its ambitious energy efficiency goals.

The state of California, local agencies, and utilities have all played a key role in incubating innovative financing mechanisms. Here is a quick update on four options that have the potential to scale up quickly: Property Assessed Clean Energy (PACE), on-bill, unsecured consumer credit, and the new PowerSaver loan.

PACE Financing

PACE financing allows property owners to pay for energy improvements as a tax or assessment on their property tax bills. This unique structure allows programs to offer competitive rates and long repayment terms.

This model was taking off like wildfire in 2010, but ran into regulatory opposition from the Federal Housing Finance Agency (FHFA) -- the regulator of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac have indicated that participation in PACE would constitute a potential default of the mortgage contract. This has prevented most local governments from offering residential PACE financing. On June 15th, FHFA released its new Proposed Rule that continues its strong opposition to PACE and states its plan to require “immediate” action to use mortgage contracts and other means to prevent homeowners from participating in PACE programs.

In the meantime, local and state governments have joined PACE advocates to pursue legislation and litigation to restore residential PACE. The PACE Protection Act of 2012 has been introduced in the House and currently has a bipartisan group of 53 cosponsors. Lawsuits from Sonoma County, the State of California, and others are continuing, with further rulings due in the next few months.

In the meantime, PACE financing for commercial buildings is expanding rapidly across the state. Building on the leadership of Sonoma and Placer Counties, many large new programs have launched or will soon get underway. For example, Los Angeles, San Francisco, and CaliforniaFIRST – covering over 100 local governments -- formed the Commercial Clean Energy Financing Alliance to support commercial PACE programs and set standards to make PACE more widely available and accessible.


On-bill programs allow consumers to repay energy efficiency loans on their utility bill. These programs have been launched across the U.S. but vary significantly in their source of capital, underwriting criteria, and loan terms.

A pilot for commercial property on-bill financing in California proved successful. The California Public Utilities Commission (CPUC) is working to build on that effort and expand to private capital sources over time.

The CPUC has also been actively investigating the expansion of on-bill to serve homeowners. However, in May the CPUC issued guidance to the investor owned utilities that regulatory and legal issues needed to be resolved prior to pursuing residential on-bill programs. An important step in that effort would be to provide the CPUC and utilities clear legal authority to implement a residential on-bill program. State Senator Kevin De Leon introduced SB 998 to create that authority. The bill is currently pending in the Senate Appropriations Committee.

Consumer Credit Financing (Unsecured)

Unsecured consumer financing provides simple, fast, and easy consumer loans based on the creditworthiness of the applicant. Most of the existing loan options in this market either carry a relatively high interest rate or are provided through subsidized programs serving specific geographic areas. Efforts are underway to provide much larger amounts of subsidies to support these types of programs and help standardize the options across the State.

In its May decision, the CPUC indicated it is working to “develop a standardized set of financing program rules and requirements… so that California can attract a larger amount of private capital.” Making a standardized product (or products) available throughout the state would simplify the process for contractors and homeowners, while potentially making the program more attractive to capital providers.

There are a couple of noteworthy efforts to speed this process along. First, CAEATFA (the California Alternative Energy and Advanced Transportation Financing Authority) has been allocated $25 million to use as credit enhancement for residential energy efficiency loans and is working on deploying those funds today. Second, a national effort supported by the National Association of State Energy Officers (NASEO) has put together a new multi-state program to fund energy efficiency loans with plans to bundle pools of loans for the capital markets. Both efforts hold immediate promise in the effort to attract less-expensive large-scale capital.

FHA PowerSaver

Lastly, there is a new type of product that just became available in California. The PowerSaver Loan is a new type of second mortgage loan that comes with partial federal insurance against loss to the lender. PowerSaver loans are available for up to $25,000 and with loan terms as long as 20 years. The homeowner must have good credit, not already have a second mortgage (such as a home equity line of credit) and at least some equity in their home, among other requirements. EGIA and SunWest are working together to provide PowerSaver loans in the State today.

In all, there are a number of good financing options at various stages of development. The key for the industry is to get at least a couple of them to scale in the next couple of years.