On-bill financing (OBF) programs are an innovative approach to energy efficiency in which utilities offer loans to their members/customers for energy improvements that are repaid through utility bills. This system allows homeowners and businesses to make energy efficiency building improvements without upfront costs.
In the past several years, OBF programs have been gaining attention around the country as a way to finance residential energy efficiency improvements. OBF programs are operating, or under development, in a number of states to eliminate the upfront cost of residential energy improvements for the homeowner by providing a low-interest rate loan. Rather than having a traditional loan from a bank or lending institution, the on-bill financed loan is with the utility and repayment on the loan is added onto the customer’s monthly utility bill. Along with homeowner convenience of having both energy savings and the loan payments on the same bill, the loan term’s repayments are structured to be longer than the payback period from the expected energy savings, resulting in a positive cash flow for the customer.
OBF can be a convenient and effective way to attract the smaller customers who usually do not have the initial capital to implement comprehensive energy efficiency projects. This unique financing strategy can help many customers with financing barriers, lower operating costs and make utility bills affordable, including rental properties, while achieving the “deep impact” project retrofits that can yield 20 percent or more in energy savings.
On-bill financing has generally been grouped into either tariff-based systems or on-bill loans. However, the programs can differ widely due to varying utility and regulatory structure and state legal requirements.
Often in a tariff-based financing program, the cost of the energy efficiency measures are tied to the meter, not the homeowner. The participant pays back the utility over time through a surcharge on their electric bill, but it is not a traditional personal loan. This allows the repayment period to extend beyond the current homeowner to the new buyer should they sell the house and move. The next customer at that meter continues to pay the financing. This is one of the few financing options that can also successfully address the split incentive issue of landlords and tenants in rental properties, with the tenant paying the utility bill and the energy efficiency investment loan repayment. The Help My House program in South Carolina uses this approach.
On-bill loans, however, usually operate like personal or business loans where the loan is non-transferable and must be paid off at the time ownership changes hand. However, some more recent on-bill loan programs have been tied to the building meter and operate as an energy services agreement.
While residential on-bill financing programs are relatively recent, successful on-bill financing programs for the municipality, university, schools and hospital markets and small commercial markets have been around for a decade or more. Similar to both residential and non-residential, the utilities can target the heavy energy users and manage the marketing and outreach to those eligible up-to-date bill paying customers to maximize the savings impacts and minimize risk on potential loan defaults. Plus, as loan payments are received, additional loans can be issued to set up a sustainable revolving on-bill financing program.
“Bill neutrality” refers to a loan repayment plan that, on average, is equal to the cost of the energy saved through energy efficiency improvements. While OBF programs do not have to be bill neutral, EESI strongly advocates for a bill-neutral (or, even better, cash flow positive) approach. OBF programs have been able to achieve deep energy savings through bill-neutral loans that are repaid within the useful life of the installed measures – usually 15 years or less.
Unlike more traditional energy efficiency programs that rely on rebates or tax incentives, OBF programs do not require any upfront costs from program participants. However, some co-ops have charged their members a fee for the initial home energy audit. This could be waived under certain conditions or rolled into the loan, at the co-op’s discretion.
Some programs have used credit checks to determine if potential participants are eligible for OBF loans, much like any other personal loan. However, several co-ops have developed successful tariff-based programs that forgo credit checks in favor of good bill payment history. If the loan is designed to be bill-neutral, the reasoning goes, then customers that pay their bills each month should be able to continue to do so with the loan folded in, regardless of their credit history. The Help My House program in South Carolina uses this approach, with very low default rates.
There are two main ways in which member-customers can join an OBF program. The first is that potential participants reach out to the utility and opt in after hearing about the program via co-op marketing or word of mouth. The second option is that the co-op directly contacts its members that have complained of high electric bills and/or have abnormally high electricity use. These two approaches can be combined together to maximize program participation. After potential participants are identified, co-ops will need a system to determine program eligibility.
The pilot program in South Carolina has a default rate under 1%. Most other on-bill financing programs run by cooperatives around the country have similarly low default rates. These low rates are a result of several factors, including the relationships between co-ops and their members, and the bill-neutral approach utilized by most OBF programs.
Yes. Rebates can be used to lower the front-end costs or provide a bonus to program participants, which would likely increase program interest and participation. Rebates could be available through the utility, state or other entity.
Have additional questions? Let us know at OBF[at]eesi.org, and we will do our best to answer.