Financing arrows in the decarbonization quiver

A comparison of utility funding models
May 18, 2022 by Claire Cowan

According to ACEEE, we need to rapidly scale deep energy retrofits to meet US and global climate goals. The International Energy Agency defines the needed retrofit pace at 2.5% per year to reach net zero emissions by 2050. That's 3.5 million retrofits per year—far exceeding the pace we currently achieve with today's financing and incentive programs!

Utilities have the power to accelerate this goal. These four common program models that finance energy upgrades. But what drives the most impact? What models are most accessible? And most important, what will work best for your market?

Model type Description
Direct bill/off bill loans Unsecured consumer loan for energy upgrade; paid back over time through direct bill.
On bill financing Unsecured consumer loan for energy upgrade; paid back over time through charge on utility bill. Some programs have energy bill neutrality requirement.
Tariffed on bill financing (TOB) Utility invests in upgrade at customer’s home & recovers investment over time through fixed monthly tariffed charge on customer bill; not consumer debt.
Pay As You Save® (PAYS®) A TOB program model with defined program design requirements and consumer protections, including the requirement that annual payments cannot exceed 80% of estimated annual savings.

There are six factors to consider to determine which financing arrow to pull out of your utility's quiver:

  • Startup cost: Direct bill programs are generally quickest and cheapest to start up because they don't integrate with the utility bill system. On-bill programs have higher startup costs because they integrate with the utility bill system. PAYS programs require updates to analytical tools, billing system integration and recruiting a network of installation contractors, which further increases startup costs. 
  • Risk: Energy efficiency loans are very low risk, with annualized loss rates below 1%. Tariffed on-bill and PAYS are subject to utility disconnection rules for nonpayment, which can make their risk even lower. Our PAYS partner, EEtility, reports no disconnections to date from any of the programs they administer. 
  • Transferability: To reach the rental market, loans need to be transferable from resident to resident. Direct bill loans are generally not transferable because the loan is tied to the individual, not the property. On-bill is more likely to be transferable, but states have different laws that may require the loan be paid off, not transferred.. Transferability is built into the TOB and PAYS models and will always stay with the property
  • Scale: Financing products need  a vibrant market engagement to drive participation. Design your program with contractors in mind and help prepare contractors to drive consumer awareness. We can help you determine which model will scale best in your market based on your customers' needs. 
  • Energy bill impacts: Will the program ensure that loan payments are lower than expected savings? PAYS programs require that repayment cannot exceed 80% of expected savings. TOB and On-bill have the option to include a requirement like this, but it isn't required, and direct bill is less likely to make this consideration. 
  • Equitable access: Inclusive underwriting approaches improve program accessibility. Traditional underwriting practices look at debt-to-income ratio and credit scores, even though energy efficiency loans are extremely low risk. Approaches that consider utility payment history improve loan application volume and approval rates. We helped one of our utility partners implement alternative underwriting practices.  Loan volume increased 51%, loan approval rate grew from 68% to 78%, and closed loan volume increased over 70%. 

An infographic describing several health benefits of weatherization, including the ones listed above.

Each model is an arrow in the finance quiver. Which one works best varies from market to market. Contact Claire Cowan to discuss which solutions to scale in your market.