On-Bill Financing
Why It Matters
You want your program to be able to help anyone in the service territory. But some populations are harder to reach than others. Financing can be a tool to unlock energy savings for all, but only if you include specific program design elements that let the program connect with low- to moderate-income households.
Using Energy Savings to Pay For Upgrades Over Time
Simplified Model of an On-Bill Financing Program. Image Credit: EESI
On-bill financing (OBF) is a financial collection mechanism in which financing for energy improvements is repaid by a utility customer — such as a homeowner or a commercial building owner — on the monthly utility bill. The utility may use this mechanism to recover its investments behind customer meters or to collect repayments on behalf of a financial partner such as a green bank or credit union. There are more than 110 on-bill financing programs nationwide delivering savings to customers.
Most on-bill financing programs finance cost-effective whole-house energy efficiency retrofits crafted to deliver deep energy savings for the participant. Increasingly programs include beneficial electrification measures, such as electrifying space-and-water heating equipment.
Newer programs increasingly emphasize equity and specifically target lower-income customers by not requiring credit scores or debt-income ratios and instead only asking for on-time utility bill payment history.
Examples of programs:
Orcas Power and Light Cooperative’s (OPALCO) “Switch It Up!”
Mountain Parks Electric Cooperative’s “Electrify Everything”
Hawaii Green Energy Money $aver (GEM$) On-Bill Program
Holy Cross Energy’s Power+
Perspective from a Co-op with an On-Bill Program
“Our new on-bill financing program has been an instantaneous success among our members, compared to our previous loan program. We have had three keys to success: a low interest rate to compete with market rates, the on-bill financing mechanism (we have had zero loan defaults in our three years), and the buy-in from our contractors in the community.”
— Steve Meyers
Member Services Administrator
Umatilla Electric Cooperative
On-Bill Financing: Removing Barriers for Decarbonization and Electrification
When designed appropriately, on-bill financing programs increase affordability, unlock access to capital for clean energy, and promote equity by providing financing to everyone regardless of income or credit.
On-bill financing improves energy affordability
Removes the need for upfront capital to pay for the energy upgrades
Designed for bill neutrality; if not, cash-flow positive on the utility bill
Aligns investments with the energy-related costs
Gives customers the ability to finance energy efficiency, beneficial electrification, and distributed renewable energy
Lowers household energy costs and reduces energy burdens
Fully leverages incentives and rebates
Increases access to capital and clean energy
Increases stability as these programs historically have low default rates
Simplifies payment because it is included on the utility bill as a line item
Ties investments to the meter rather than the individual
Uses utility bill payment history to screen participants in lieu of traditional underwriting criteria (e.g., credit scores, debt-to-income ratios, or job verification)
Investments tied to a meter provide a wide range of benefits to customers
Allows repayment to transfer to later owners or renters
Allows for longer repayment periods up to 20 years, which translates into more affordable monthly payments for participants
Provides a solution to the split incentive, where there is a misalignment between who pays for the energy upgrades (landlord) and who receives the benefits (renters)
Allows for renters to participate in the program, expanding program eligibility to a greater number of members, which are typically left out of traditional energy efficiency financing programs
Multiple consumer-oriented measures help ensure savings are delivered as expected
Uses trained and certified energy auditors and contractors
Implements quality assurance process and evaluation, measurement, and verification of savings
Aligns repayment terms with common warranty periods for the eligible measures
Holds contractors accountable for their work with post-audits and not paid until all work is completed and deemed satisfactory by the utility
Can be connected to a loan loss reserve, which then protects both the utility and the participant in non-payment or defaults situations — and allows for lower interest rates
Recommended On-Bill Financing Model
The Environmental and Energy Study Institute recommends that on-bill financing programs include the following primary program designs:
Assign investments or tariffs to the meter, rather than the individual, and show it as a line item on the utility bill
Screen applicants using on-time utility bill payment history instead of credit scores
Structure repayment plans to deliver positive cash flow or at least be bill neutral for the participant (on an annualized basis when all energy bills are combined) even while paying for the upgrade
Eliminate upfront costs to participants (with reasonable program fees rolled into the on-bill repayment plan)
Include a loan loss reserve to serve as protection in case of non-payment or defaults
Hold contractors accountable for their work with post-audits
Design Considerations for On-Bill Financing Programs
When thinking about designing an on-bill financing program, it is important to have an effective and informed program planning, design, and implementation that can help maximize the uptake and impact of your program. The following provides an overview of design considerations that utilities and program administrators need to evaluate regarding program goal setting, financing administration, deciding on a financing mechanism, selecting capital for your program, marketing your program, and assessing and managing contractors.
Program Goal Setting
There is no one right way to implement an on-bill financing program; utilities face the same questions when designing an on-bill financing program:
Who do we want to reach?
What do customers need to finance?
What do we want the program to accomplish?
How will we measure success?
Who do we want to serve?
What member needs do we want to resolve?
For more information on program goal setting, see here.
On-Bill Financing Models
On-bill financing programs can be divided into two major categories: on-bill loans, and on-bill tariffs (i.e., tariffed on-bill financing).
On-bill loans are those where the utility offers a loan to the participant to pay for the energy upgrades, and the participant is then responsible for paying (or assigning the proceeds to) the contractors. Under this model, loans can be either tied to the individual or to the meter, and some utilities utilize a hybrid underwriting method (credit score plus utility bill payment history) to screen participants into the program. While most utilities operating on-bill financing programs use this model, EESI recommends that the loan be assigned to the meter if this model is used.
In on-bill tariff programs, the utility pays the contractors for the electrification and energy efficiency upgrades to the participant’s home or business. The participant repays the investment using a portion of the savings, through a line item on the monthly utility bill, with no upfront cost or debt involved. The investment is tied to the meter, and program eligibility is based on utility bill payment history, not credit scores. Additionally, on-bill tariff programs place emphasis on delivering immediate energy savings to the participant. Utilities can also partner with a third-party financial institution (e.g., green bank or credit union) to provide the capital for the program. The financial institution pays the contractor for the energy-related investments. Acting as a pass-through entity, the utility then pays the investment back to the third-party financial institution. The Hawaii Green Energy Money $aver (GEM$) on-bill program – which EESI helped develop – is a prime example of this model. GEM$ focuses on financing solar panels for low-income and moderate-income households, commercial accounts, and nonprofits.
Program Administrators
Utility participation in an on-bill financing program varies along a spectrum and can take a series of scenarios and possibilities.
On the high end of the utility-participation spectrum, a utility could operate an on-bill financing program on behalf of all the member communities interested in participating. In this scenario, a utility would be involved in all the elements that compose an on-bill program, meaning originating and servicing loans for the program, approving contractors, marketing the program, and greenlighting participant loans/investments. Depending on the size of the utility may have to dedicate at least one full-time staff to operate the program.
In the middle of this spectrum, a utility may contract with a financial partner that performs key tasks, but the utility could be involved in aspects of the process, such as making loan approvals, buying down interest rates, processing loan applications, or handling delinquent accounts.
On the lower end of the spectrum, a utility could outsource all of these roles to third parties, leaving the utility the role of collecting the finance payments via a utility line on the participant’s monthly bill and then passing on those payments to the financial partner. In this scenario, the utility acts as a pass-through entity for the on-bill payments, reducing their exposure to possible defaults and non-payments.
Billing Systems Vendors
Most co-ops and small utilities already work with a vendor that provides billing system software. Vendors such as NISC, Cayenta, and SEDC all offer varying levels of on-bill financing functionality in their software. This is commonly done via a free add-on module for on-bill financing, but only in newer versions of the software. While this functionality is not always required to operate an on-bill program, it makes program tracking and bill integration much simpler. It is a good idea to contact your current billing system software provider early in the program design process to understand the functionality your system currently provides and determine what would be gained by updating the billing software.
Additional Design Considerations
See the following Toolkit pages for additional information that is relevant to an on-bill financing program design: