Daunting upfront costs are among the highest hurdles for electric co-op members considering energy efficiency upgrades, such as better home insulation or new water heaters or heat pumps. The bar is even higher for distributed generation options like rooftop solar panels.

Especially when combined with rebate, education, and marketing programs, co-op-sponsored financing options can take the upfront sting out of efficiency improvements.

Installing a whole-house air-source heat pump, for example, can cost up to $8,000 and even more if the project involves new or updated ductwork. On-bill financing spreads that cost over as many as 10 years as a manageable added monthly charge on the bill that makes it possible for many more members to consider taking this step.

Often, the efficiency savings exceed the loan-repayment amount, so the cost impact on the member amounts to a wash.

OBF programs usually come in one of two forms: a straight loan, repaid through an add-on to the bill, or a voluntary tariff, similar to the familiar surcharges for additional services like line extensions and also paid as part of the monthly bill.

When it comes to financing such programs, co-ops have a range of options. In addition to tapping internal reserves, they can turn to their traditional rural electric lenders: the federal Rural Utilities Service (RUS) and National Rural Utilities Cooperative Finance Corporation (CFC). Some G&Ts and the Tennessee Valley Authority (TVA) provide similar financing support, either on their own or in partnership with regional banks, as well as program marketing and administrative assistance.

Strategic Moves

Co-ops and other utilities have good strategic reasons for taking a hard look at efficiency-oriented OBF programs:

Achieving mandatory energy savings. OBF programs can also help co-ops and other utilities meet energy efficiency targets set by state and local policy-makers. Two dozen states have established efficiency resource standards, and in 15 of those states, at least some of the requirements apply to co-ops. Efficiency initiatives could also help utilities meet potential carbon emissions restrictions.

Reaching underserved members. Financial assistance from a trusted energy provider like a co-op can also extend efficiency measures to consumers who may face obstacles to participation, such as low-income members. Many OBF programs, including those offered by at least 10 co-ops, work past low credit scores by qualifying program participants based on their utility bill payment history. And research shows that default rates are low across all OBF programs, regardless of underwriting criteria.

Eliminating non-participant contributions. Many co-ops seek to minimize the contributions made by nonparticipants to energy efficiency programs. OBF programs can be designed to ensure that the cost of efficiency measures fall only on the participants themselves, with built-in fees to cover energy audits, credit checks, and some administrative costs.

Stretching rebate and other efficiency budgets. OBF programs enable co-ops to tackle larger projects with multiple or more expensive measures without increasing rebates. They can also help co-ops tap into private capital to further leverage limited efficiency program budgets.

Helping members install rooftop solar. The Solar Energy Industry Association expects residential rooftop photovoltaic systems to be the largest-growing sector of the solar market, building on record levels of home rooftop panels installed in 2015. Costs for these arrays have dropped dramatically in the last decade, but they still range from $3,000 for a 3-kW system to $35,000 for a 10-kW installation. Some solar manufacturers have moved to blunt the cost impact by financing installations or, when allowed by state law, becoming third-party owners of the home system. Rather than allowing these companies to become energy providers to co-op members, the co-ops can step in themselves with OBF programs. This study found only three co-ops explicitly using OBF offerings to finance residential solar.

Increasing member engagement. With more third parties than ever before offering energy services, a solid OBF program can help a co-op maintain its role of trusted energy advisor. Even if some of the services are provided by outside manufacturers and contractors, the OBF program can leverage and reinforce the trust co-ops have built with their members. A financing program is an especially valuable tool for members with high energy use and high electric bills who don’t have the cash or credit to invest in efficiency.

As a final strategic consideration, OBF programs appear to significantly boost member satisfaction with a co-op. Midwest Energy in Hays, Kan., offers its nearly 50,000 electric consumers a branded efficiency financing program, and 97 percent of the participants in that program reported they were satisfied with the co-op. Among all members, the satisfaction rate is 85 percent.

By the Numbers

The authors note that these figures probably fall short because some programs are not actively advertised but instead are offered by a co-op in response to member interest or high-bill complaints.

Among those programs, 111 finance only residential projects. Nine offer financing for both residential and commercial improvements, and three are geared exclusively to commercial or industrial accounts.

Forty-two programs, most of them affiliated with TVA, are aimed primarily at heat pump installations, although TVA also includes weatherization measures.

Four programs are strictly for water heaters, and two of those are restricted to solar water heaters. Three programs explicitly include solar or other distributed renewable energy sources.

Credit and risk assessments are explicit requirements for participation in 51 of the programs, with 41 of those usually relying on a credit-rating check and nine of them setting specific rating requirements. Participants in the other 10 programs appear to qualify based on good payment histories with the co-ops.

The study’s authors also interviewed co-op staffers about defaults in their financing programs. About a dozen of those staffers reported program default rates ranging from near zero to 3 percent.

As for loan amounts and terms, two residential financing programs were capped at $500, and those loans had to be repaid within six months.

Far more often, the advertised limits ranged from $5,000 to $15,000. Of the 59 residential programs with published loan caps, the median amount was $10,000, and the average was about $12,000. Most of those loans carried a repayment period of five to 10 years.

Interest rates on financing were listed for 75 of the programs the researchers found; the others did not specify a rate or adjusted their rates based on the prime rate. Some programs had multiple rates, depending on the participant’s credit rating, the amount of the loan, or the type of efficiency project.

Nine programs offered zero-interest financing. Among those that charged interest, the average maximum rate was about 5.5 percent. The highest listed rate was 11 percent.

While funding sources for the programs often go unreported, the researchers identified the capital source for 78 programs. Forty-seven were supported by TVA through both OBF and off-bill programs; 10 appeared to receive RUS backing; and the others used internal funds, grants, or other financial institutions.

The study’s authors were also able to identify the finance structure for 104 of the co-op programs. Of those, 35 were loan programs administered by the co-ops themselves, 60 were loans administered by other financial partners (and 45 of these were handled by financial institutions in partnership with TVA), and nine used tariffs to recover the financing.

Loan volumes vary greatly among co-ops offering financing programs. Some processed more than 100 loans annually; one program handled only five a year.

The researchers also found evidence of 27 co-op financing programs that have been suspended or are inactive. Some of those may have been part of stimulus programs enacted after the economic crisis of 2008.

The Basic Elements

Unless it’s properly designed, an OBF program can prove to be complicated and time-consuming. Co-ops should consider a range of factors before moving on to develop an efficiency financing program.

To begin with, the co-op will have to consider ways to drive demand for the financing it proposes to provide. These include education and marketing programs to generate interest in the products, services, and systems themselves; incentives like rebates for efficiency upgrades; and identifying qualified contractors and trade allies.

Regulatory and legal compliance issues must also be sorted out ahead of time. Federal laws and regulations, established in the wake of the financial and economic crises starting in 2008, play a role in OBF loans, and some states also have laws and regulations governing such lending. Service disconnections for non-payment of loans or tariffs may also be a concern, although default rates have proven to be very low on OBF programs.

A co-op will also need a reliable source of capital to underpin its OBF program. While some co-ops have chosen to use internal reserves, plenty of other options exist. RUS’s newest offering, the Energy Efficiency & Conservation Loan Program, has attracted attention because it makes money available to the co-op at the same rate the federal government pays. Other co-op programs have been funded by RUS’s Rural Economic Development Loan & Grant Program or CFC.

The loan-versus-tariff question will also have to be settled in advance. Loans, even when paid off as part of the monthly utility bill, are familiar to both consumers and the co-op’s financial partners. Consumers and bankers may be less accustomed to voluntary tariff arrangements, but they’re routine cost-recovery vehicles for co-ops and other utilities.

Tariffs, however, have the advantage of being more closely linked to the meter, and thus to the home where the financed improvements have been made, than loans.

Partnership opportunities should also be explored when a co-op considers launching an OBF program. The most successful financing programs often make use of implementation contractors or other partners to get off the ground. Partnerships with financial institutions, for instance, were a key feature of at least 60 co-op OBF programs, according to research conducted for this study.

Numerous policy and procedure issues must be addressed as well. These can cover lots of ground: setting loan underwriting criteria; loan origination, including reviews, approvals, and disbursements; servicing the program, including needed billing system updates, sending statements, processing payments, and collecting on delinquencies; and data reporting to funding sources.

What Works?

A successful and manageable consumer-centered financing program needs to have the following characteristics:

Member friendly. Application processes must not be any more complicated or lengthy than those of other types of consumer loans. The program should also allow for online processing of applications, audits, bids, and program tracking.

Efficient. Administration of the OBF program must be streamlined and cost-effective.

Attractive terms. Not surprisingly, low interest rates and long repayment terms in the range of 10 to 15 years contribute strongly to a program’s success.

Quality products and contractors. High standards for both products and installers used for the efficiency program will pay off in high member satisfaction.

Flexibility. The program’s success will also depend on how well it matches the unique needs and capabilities of the co-op offering it. Some co-ops will prefer to play a limited role as the public face of the program, while others choose to handle every task in-house.

Inclusive. Many co-ops will strive to accept applicants who do not have good credit histories. In such cases, the co-op should consider setting up a loan loss reserve or be willing to accept a higher default rate.

Compliant. The programs must follow federal and state laws and regulations on consumer lending.

Broad coverage. Different types of energy efficiency and renewable energy measures should be eligible for participation in the OBF program.

Scalable. Co-op staff time should be adjusted as needed to avoid limiting participation in a financing program.

This article is adapted from Financing Member Investments in Efficiency and Solar: A Solution for Cooperatives?, a TechSurveillance report released in February 2016 by the Renewables and Distributed Generation Work Group in NRECA’s Business & Technology Strategies unit. The full report was written by Patrick Keegan, Christine Grant, and Amy Wheeless, all of Collaborative Energy, an energy services firm specializing in the development of efficiency programs at consumer- owned electric utilities.