The strategies outlined below help create self-sustaining clean energy finance programs.

Prove Energy Efficiency Finance as a Profitable Line of Business for Financial Institutions

To achieve sustained financing in the clean energy field requires financial institutions to perceive clean energy lending as a profitable, creditworthy, and sizable business. At the moment, only a small number of financial institutions operate in the clean energy lending space. Financial institutions need to know that two primary issues are resolved before they jump fully into the clean energy lending field—transaction costs and deal flow. A key lesson learned from past and current clean energy finance programs both at home and abroad is that financing alone is not sufficient to spur investment in clean energy and transform the residential market. Successful energy efficiency/renewable energy finance programs combine access to finance with marketing, project development, and project delivery. Those last three services ensure that a steady flow of investment-ready projects are available to lenders to be financed. Without those services it would be entirely possible to develop a financing program that had little or nothing to finance. The absence of deals to finance (i.e., creditworthy property owners who want to make energy efficiency/renewable energy improvements)—even in the presence of attractive financing terms—has been a major weakness of many early energy efficiency/renewable energy finance programs. So, the finance mechanism has to be part of an overall program design that drives demand.

Vendor and Contractor Network

Vendors and contractors in the energy efficiency/renewable energy equipment and service sectors are key businesses that can drive the market. They stand to profit and grow from the work brought in under the clean energy loan program, and they can become program champions. Developing, nurturing, and expanding an effective vendor/contractor network is essential to program success.

Documenting a History of Success

As participating lenders around the country gain experience with the new energy efficiency/renewable energy financial products and financing programs, they will keep records of the collections payment performance. One element of the U.S. Department of Energy's work on best practices in clean energy finance is to compile data on collections payment performance for various types of clean energy financial products, such as unsecured residential energy efficiency/renewable energy loans, loan loss reserve (LLR) fund programs, and property-assessed clean energy transactions. Over time, the availability of data will help primary lenders and secondary investors assess risk and price their financing accurately.

Review Leverage Ratios for Loan Loss Reserve Funds and Increase Funding for Loan Loss Reserve Funds

One strategy for creating a self-sustaining clean energy finance program is to review and reset leverage ratios as you gain experience. For instance, one program in the southwestern United States has a 4:1 leverage ratio based on a 25% LLR. The leverage ratios in the early stages of this clean energy lending market may be lower at first as lenders get comfortable with the market. For example, if a financial institution starts with an LLR of 10% of the total loan portfolio, perhaps after 2 years of experience and evidence that actual loss rates are say, below 1.5%, the size of the LLR relative to the loan facility could be reset at 5%. That would permit the same amount of LLR to support a doubling of the total lending amount. In fact, the incentives for the financial institution and the Recovery Act grantee are aligned in this regard. If the financial institution learns that energy efficiency/renewable energy financing is a profitable business, it will want to increase its lending and include more loans in the portfolio covered by the LLR.

Another path for scaling up the clean energy lending program is to find additional sources of funds to supplement the LLR. If the LLR can grow, the financial institution lending facilities can expand commensurately. Potential sources of funds for the LLR include vendors/contractors, utility customer funds, state allocations, emissions allowance revenues, and other donors.

Build the Secondary Market

Developing a secondary market for residential energy efficiency/renewable energy loan portfolios will provide a path to commercial sustainability of clean energy lending. Some financial institutions will decide to originate loans, assemble portfolios, and then seek to refinance or sell the portfolios to a secondary market capital source. A typical target portfolio size for an early-stage secondary market transaction is $20 to $25 million although later transactions may be much larger, in excess of $100 million. Availability of financing from the secondary market can drive development of the primary market and also lower the costs of capital.  

Alternatively, a green CRA-type policy could be adopted that sets lending targets for clean energy.

For more detailed discussion, download the Clean Energy Finance Guide to Residential and Commercial Building Improvements' chapter on the Path to Self-Sustainability.