A first step in developing an on-bill financing program is to identify the various pros and cons of using different sources of capital and options for how the financing might be structured, while assessing against the specific policy and programmatic goals (e.g. low interest rate, longer term loans with energy savings exceeding the loan repayments). For municipal electric utilities, there are several capital sources that can be considered. Credit enhancements, such as loan loss reserves, serve to manage risk from potential defaults and to reduce borrowing costs in on-bill programs.

Credit Enhancements

Sources of Capital


Credit Enhancements

Credit enhancements, a form of risk management, protect the financial exposure of a lender to losses in the case of a borrower default or delinquency. The credit enhancement can be a pool of funds, such as a portion of the total dollar amount of the outstanding loans, which is placed in a reserve and functions as insurance.

Loan Loss Reserves

One of the most common and widely used credit enhancement strategies due to its ease of implementation is the Loan Loss Reserve (LLR).  It the setting aside of a limited pool of funds from which the financial entity can recover a portion of their losses in the event of borrower defaults.  Typically, the size of LLRs are in the range of several percent up to 10% (i.e. the loan pool coverage ratio) of the amount of capital allocated for the program.  In this case, the loan pool coverage ratio is the maximum percentage of a pool of loans that can be recovered from the LLR.  The lower the loan pool coverage ratio, the higher the leverage of the capital monies (e.g. a 5%, $1 million LLR can support $20 million in lending and leverage LLR monies 20 to 1). 

Loan Guarantees

Thought of as a variation of the LLR, the loan guarantee enables lenders to recover all potential losses due to defaults.  A loan guarantee can be thought of as having a loan pool coverage ratio of 100% and the individual loss-share ratio of 100%.  While a loan guarantee could be designed to cover all loans in a portfolio, they can also be designed to only cover loans for a period of time, to a specific number of loans, or to a certain initial dollar amount of loans.   

Debt Service Reserve Funds

Another approach that sets aside a limited reserve is a debt serve reserve fund (DSRF) for which a lender can recover any overdue debt payments on a loan.  A DSRF is similar to loan loss reserves, but are commonly used where a delay of customers’ payments, even prior to default, could severely impact a lender.

Subordinated Capital

Subordinated capital can be placed along-side senior capital from a lender, absorbing all default losses up to the amount of the subordinate capital.  By covering all losses until it is exhausted, subordinated capital takes on the majority of loan default risks and acts as a credit enhancement for senior capital. 


Sources of Capital

Public Sources

Public funding

Applying for and receiving grants from federal and state sources is a common strategy to fund the initial “startup capital” needed for a residential energy-efficiency loan program. The American Recovery and Reinvestment Act provided significant funding for OBF programs; however, current public funding related to energy-efficiency is far less robust.

Bond issuance

Many states and local governments are using bond financing to pay for energy-efficiency projects, as well as clean energy investments. Bonds are debt security, attracting investors by packaging the cash flows from energy efficiency loans into widely tradable liquid instruments in the financial markets.  General obligation bonds, which are backed by the full faith and credit of the municipality, usually receives very favorable ratings and low borrowing costs. These bonds are typically repaid from general revenue. Among the lowest cost public financing tools are qualified energy conservation bonds (QECBs) as the U.S. Department of the Treasury subsidizes the issuer’s borrowing costs. Green bonds represent an innovative tool to fund large-scale OBF programs in a sustainable way, albeit with higher interest rates.

U.S. Department of Agriculture (USDA) Loans and Grants 

  • USDA Energy Efficiency and Conservation Loan Program (EECLP):

This loan program is available to rural electric utilities serving population centers of 20,000 or fewer. The government-rate loans can be used for improving energy efficiency, reducing overall system demand, attracting new businesses by investing in energy efficiency, and/or encouraging renewable energy or demand side management. Applications are non-competitive and considered on a rolling basis.

  • USDA Rural Economic Development Loan & Grant Program (REDLG):

This competitive loan and grant program is available to non-profit rural utilities for projects with economic development benefits in a rural area with a population of 50,000 or fewer. This has occasionally been used to fund clean energy efforts. The program offers zero-interest loans of up to $1 million and grants of up to $300,000.


Utility Funding

Internal utility reserves
Utility reserve funds are the most common source of capital for OBF programs by municipal public power utilities (SEEAction 2014). Depending on availability, utilities can use their own internal funds in the initial program phases to drive demand in the short term. For longer-term usage, considerations about maintaining a minimum cash reserve level, and how using reserves may impact the financial health of the utility (e.g., impact to credit rating) come into play. OBF programs can be established as revolving loan funds that utilize interest and principal payments on old loans to issue new ones.

Ratepayer funds
A separate and dedicated funding mechanism, collected in rates, to support a residential energy-efficiency program. This “utility tariff” can be applied across a category of ratepayers (i.e., residential electricity customers) in the form of a charge on a per kWh usage/consumption basis.


Private Sources

Private lending institutions

Private banks, community development financial institutions (CDFIs), and credit unions are a growing option for deploying large amounts of capital to support energy-efficiency financing. These private entities can underwrite, fund, and service residential energy-efficiency retrofit loans. The utility could collect the loan repayment on the utility bill. Programs that use private capital can readily get to scale, but coordination between financial institutions and utilities can be complex and costly.

Foundations and charitable organizations 

Several national and regional foundations have provided “seed funding” for various energy-efficiency programs that can pilot innovative approaches. In many cases, demonstrating a commitment to serving underserved or difficult-to-reach target audiences is a priority for these organizations.

Secondary markets 

Access to large capital pools to fund long-term OBF program is possible by tapping into the invertor market through specialized products such as revenue bonds, asset-back securitizations, and loan portfolio sales.


The following table summarizes the various potential sources of capital and their associated benefits and challenges.

Sources of Capital

Potential Benefits

Potential Challenges

Internal Utility Revenues

  • Most flexible resource
  • Exhibits a strong commitment and leadership to community sustainability goals
  • Can leverage significant private capital
  • Limited resource
  • Direct function of internal risk tolerance
  • Need to blend with other sources of capital to make program scalable

Public Funds

  • Similar benefits as utility revenues
  • May come with strict federal/state restrictions and requirements
  • Public models do not “educate” the capital  markets about the energy efficiency benefits

Ratepayer Funds

  • Similar benefits as utility revenues
  • May be considered by ratepayers as a “tax”
  • Greater risk concern; hard to gain approval of oversight boards

Bond issuance

  • Enables low interest rates
  • Backed by the underlying designated revenue streams
  • Longer term loans to customers
  • Can be used to replenish capital
  • Adds to public debt burden
  • Ramping up the number of projects to justify bond issuance takes time and transaction expense
  • Requires experienced bond counsel
  • Expensive for small issuances

City Millage

  • Similar benefits as utility reserves
  • Must be approved by ballot measure in most case or procedures established by the jurisdiction
  • Takes time and transaction expense

Private Lending Institutions

  • Significantly leverages limited resources
  • Can evolve to a more sustainable, market-based approach
  • Convenience of loan repayments on existing utility bill, rather than new lender bill


  • Least flexible
  • May require more restrictive underwriting and product terms
  • Will seek senior or pro rata treatment for repayments

Foundation and Charitable Organizations

  • Some interest and “seed funding” occurring to pilot unique and potential replicable efforts
  • Flexible grants
  • Amounts are relatively small, often not used as loan capital, but for start-up costs
  • Administrative time to seek out, prepare proposals and manage grants

Contributions from Individual Investors

  • Flexible resource
  • Could be used to comply with the matching requirements in leveraging non-public funding
  • Legal requirements for accepting investment dollars need to be considered
  • Contributions are small and require administration to handle

Secondary Loan Sales

  • Access to expanded sources of private capital
  • Could attract lowest-cost capital
  • Need to design program to suit the risk tolerance of the secondary market investors