Energy Efficiency Finance (continued) Loan Loss Reserve Fund One of the most effective credit enhancements is the creation of a loan loss reserve (LLR), which lowers the risk to the financial institution while simultaneously leveraging the program’s capital. This allows programs to take a “portfolio approach” to credit structuring. Loss reserves can be as low as 2% but are more often around 10%. This money is set aside to cover certain losses. For example, a 10% LLR on a $20 million portfolio would cover up to $2 million of the financial institution’s losses due to default. Sometimes, there is also a first loss percentage that determines how much of the first losses the reserves will cover. This is typically 80%-90%. A properly structured 10% loss reserve fund, for example, can support 10 times more funds than a comparable rebate. With $1,000, a program can provide a one-time $1,000 rebate or can establish a loss reserve fund that supports a $10,000 revolving loan fund, which can be recapitalized through interest payments and loaned again and again. Instead of supporting just one retrofit, that $1,000 can be used to support many. Iowa’s fund helps ensure that private sector lenders will make loans for energy efficiency to industrial, agricultural, and commercial businesses. A related mechanism is a debt service fund (DSF), in which case capital is put aside to cover interest payments in the event of late payments or defaults by program participants. Some states like Iowa have taken the step of helping to secure private capital for energy efficiency improvements through the creation of a loan loss fund.
Revolving Loan Funds State revolving loan funds (RLFs) have existed since the 1970s and 1980s, when early states such as Nebraska and Texas developed RLFs with money from petroleum related fees145. Today, the vast majority of states have at least one RLF, including 11 states in the Midwest. RLFs allow programs to lend to participants from a single fund that is re-seeded with principal and interest payments from participants. The fund is in turn lent to future participants. RLFs can be structured in such a way that interest payments are sufficient to cover administrative overhead and default rates so that the capital base is kept intact and the pool of funds to draw from long term is maintained. Nebraska’s Dollar and Energy Savings Loan Program, a RLF administered by the Nebraska Energy Office created over 20 years ago, is still active today. In this program, the Energy Office invests in the loan by purchasing 50%-75% of the loan from the lender at 0% interest146. Nebraska’s program has financed over 25,000 projects totaling more than $200 million147.
Sector-Focused Financing As with the on-bill financing programs, the energy efficiency financing programs can vary with regard to their target audience as well as the eligible products, and the size and terms of the loans. What these programs offer is access to capital for residents, local governments, colleges, and businesses across the state rather than in a particular utility service territory or a jurisdiction that is pursuing PACE financing. As Table 19 indicates, there are examples of these state policies and programs across the Midwest.
72