Financing Program Pitfalls to Avoid
Clean energy financing programs are not a new concept; however, many programs launched over the years have not had the impact intended. Financing program pitfalls to avoid are listed below.
Don't Assume Financing Alone Will Increase Demand
Program experience shows that financial incentives do motivate customers and can be extremely important to getting a program off the ground, but don't assume that financing alone be enough to drive demand. There are many programs for financing clean energy in the United States, but only a tiny fraction of the population has been reached (to find existing programs in your area search: www.dsireusa.org), which indicates that there are challenges beyond financing that keep customers from taking on clean energy projects.
Don't Assume that One Financing Program Will Meet All Needs
Utilities, private financial institutions, and state and local governments have developed a number of innovative financing programs. These programs and others can serve different markets at different transaction points. Some are streamlined and designed to provide quick access to money to buy energy efficient equipment (furnaces or air conditioners, for example); others are more complex but provide access to larger amounts of money to fund full-scale efficiency retrofits or renewable energy installations through a second mortgage, a secured loan, or a primary energy efficient mortgage.
Instead of choosing a single loan product and hoping that it covers all markets and needs, it may be appropriate to either choose one market and focus a loan product on that market or create a portfolio of loan products to serve different markets and needs.
Don't Focus on Customers That Have Affordable Access to Capital
To have an impact, programs must either make financing available to those who don't already have access, or offer financing that is attractive enough to induce additional improvements. It is relatively easy to provide financing to those who are educated, motivated, and creditworthy—but these are exactly the customers who are least in need of financing. Programs must address the financial barriers faced by those most in need of financing, including those with the highest energy cost burdens as a percentage of income, low or fixed incomes, poor credit, and those in rental housing. Many existing programs have credit requirements that include credit rating minimums and debt-to-income limits, and few programs systematically count expected energy savings as increasing the ability to pay.
If a program is targeted to an audience that already has easy access to credit, then the program needs to be attractive enough or easy enough to use that it entices building owners to invest in new improvements that they wouldn't have otherwise made. This "additionality" is important to consider, especially before subsidizing a loan program through an interest rate buy down or other incentives, which can be very expensive compared to other applications of funds to reduce energy use.