On-bill financing comes to New York State

New York State recently passed a law that would allow for New York buildings to access on-bill financing to fund retrofits, which is expected to be signed into law by Governor Cuomo. On-bill financing is a mechanism that allows buildings to borrow the upfront capital needed for a retrofit from a utility and pay the loan back over time via an additional change on the normal monthly utility bill, hence the name “on-bill financing”.

Our friend Fred Fucci and his colleagues at Arnold Porter have put together a publicly available overview that gives much more detail on the workings of the program.

On-bill financing isn’t all that different from PACE financing, but uses the utility instead of a municipality as the source of capital for the retrofit. On-bill financing has a number of important features that make it an attractive way for financing retrofits: 

  • The financing arrangement stays with the building. If the building is sold, the new buyer simply assumes responsibility for paying the loan back to the utility. Buyers of real estate are very skilled at assessing these types or arrangements, which means on-bill financing poses little to no risk to existing building owners in the event of a sale 
  • On-bill financing does not require a first priority lien on the building. Unlike PACE, where Fannie and Freddie effectively scuttled the program based on their concern about superpriority tax liens coming ahead of existing mortgages, on-bill financing would have a lien junior to the existing or future mortgage. This works much better from the existing lenders perspective of course, but also works well for the utility: the utility retains significant security via their ability to “turn off the switch” if the building does not make payments on the loan.

 What is the takeaway?

We view this new law as a huge step forward for the energy efficiency finance market in NY State. Utilities providing cheap capital for retrofit projects will certainly help fill the funding gaps that rebates and incentives leave behind.

Psychologically, there may also be some benefit to having the utility as the source of financing. Versus some of the independent energy efficiency financing companies, the utility is certainly perceived as a much stronger counterparty, which may provide some additional comfort from the building owner’s perspective.

And as we’ve often described here at Financing Efficiency, our core belief is that retrofits are entirely dependent on real estate – i.e. building owners and managers hold the keys to achieving scale in the retrofit market. The success of the on-bill financing program, therefore, will depend on how strongly building owners respond to it.

We also spoke with Brad Copithorne, an energy efficiency finance expert with the Environmental Defense Fund.  Brad applauded the work being done in New York, and suggested possible pathways for further improving the quality of the program.  In particular, commercial banks could provide the financing instead of NYSERDA, a state research organization.  By using third party capital an even broader range of transactions might be financed.  In this model, the utility would act only as the payment processor, which is a service the utilities are already effectively providing.  Banks would then be responsible for providing the loan capital and establishing the underwriting criteria.  There are also open questions as to whether on-bill financing could be considered off-balance sheet.

We believe the New York bill is a promising start, but it remains an open question whether on-bill financing will successfully play a large role in financing retrofits at scale. It is now up to real estate to decide what type of energy efficiency financing mechanisms they want to engage with.


2 Responses to On-bill financing comes to New York State

  1. Pingback: 10 Ways to Boost You Building’s Energy Efficiency in 2012 | Green God

  2. Pingback: 10 Ways to Boost Your Building’s Energy Efficiency in 2012 | Green God

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