The Green to Fund Green

September 26, 2018

By Megan Campbell

The last ten years have seen an explosion in the number of financing options available for energy efficiency and renewable energy upgrades. With more financing choices than ever, both homeowners and energy efficiency program implementers are looking for the best options for financing energy efficiency upgrades that lead to deeper energy savings.

New Financing Options
Traditionally, property owners have conventional financing options for energy efficiency projects, such as personal loans, home equity lines of credit (HELOC), credit cards, as well as energy-specific credit cards available through major banking institutions. However, these options do not address access to financing as a barrier to energy efficiency and, more recently, new options have become available. In 2008, the green bank concept was conceived as a way to facilitate clean energy development. Defined as a public or quasi-public financial institution, a green bank maximizes public funds and private-sector investment to create low-cost, long-term financing for clean energy measures. State green bank programs such as those in Connecticut and New York (the first states to adopt) have had great success in terms of lending volume. Since its establishment, the Connecticut Green Bank has surpassed $1 billion in clean energy investment and, to date, the NY Green Bank has made close to $458 million in overall investments. Alternatively, Property Assessed Clean Energy (PACE) programs allow a property owner to finance the up-front cost of energy improvements made to their property and then pay the costs back over time through their property tax bill (10 to 20-year terms). With all these options, which financial products are residential clients turning to? And are they getting the most bang (or energy efficiency) for their buck?

Baby Steps for Energy Efficiency Financing
At the time when energy efficiency financing products were emerging for the residential sector, Opinion Dynamics conducted a market characterization study for energy efficiency financing. Through a general population survey of California homeowners, we found that over a two-year period (2014-2015) 36% of homeowners made some upgrade to their homes that reduced energy use. Of these, a quarter used financing to pay for the upgrade, most commonly (over 80%) a conventional, non-energy efficiency financing product, such as loans offered through retailers, contractors, and credit cards. Extrapolating to the population, this means that only 1 to 2% of California homeowners in that two-year period used an energy efficiency financing product.

How Far Can EE Financing Grow?
This finding raises several important market questions. How many customers want or need new financing options and how many need financing at all? How can we encourage homeowners to invest in deeper retrofits that lead to deeper energy savings? Is it possible that more attractive financing options could entice more homeowners to invest in energy-efficient upgrades and potentially invest in larger projects at one time? With the plethora of existing energy efficiency and conventional financing options, what type of financing product would cut through the market noise and resonate with a homeowner?

Addressing Customer Needs
To help answer these questions, Opinion Dynamics recently conducted a latent-class, discrete-choice (LCDC) research study with over 400 homeowners to identify the financing product features that resonate most with those looking to upgrade their homes. In this study, customers completed online “shopping exercises” asking for their likelihood to pay for a given home improvement project with varying project costs, payment methods, underwriting criteria, financing services, energy savings thresholds, and rebate levels.

When faced with a marketplace full of options and features, the study revealed that most homeowners (78%) preferred some sort of financing over cash or credit card, suggesting that customers who used no financing in the baseline study (75%) may have chosen financing if they found an attractive option. The LCDC showed that a variety of financing models would be attractive in the market, though term loans were the most popular type of model. However, rather than financing type, the monthly payment amount, or more precisely, an affordable monthly payment amount (from the homeowner’s perspective) was the most critical factor in encouraging homeowners to take out a loan for home improvements.

Many utilities in the industry are struggling to make whole-home upgrade programs cost-effective under the traditional rebate model. Some utilities are attempting finance-only pathways to whole-home upgrades as a potentially more cost-effective solution to encouraging deeper savings. Based on the research to date, many homeowners may attempt a deeper retrofit if they find an affordable monthly payment solution.