Loan Programs

Description

---

Loan programs may be used to encourage the installation of renewable energy technologies by helping customers overcome the financial barrier associated with high up-front equipment costs. While loans don’t reduce the price tag, they can help make purchases more affordable by spreading the cost of the system over time. States, utilities, and local governments can use low-interest loans to encourage the adoption of renewable energy technologies. These programs may also provide lower interest rates, more favorable terms, and lower transaction costs relative to private lending arrangements. Government agencies and utilities may administer the financing program directly or leverage funds by partnering with private lenders.

Many design and implementation options exist; loan programs can be fashioned to achieve a specific goal, target a specific sector, or to operate under various constraints. Funding for loan programs can originate from a variety of sources, including annual appropriations, public benefits funds, renewables portfolio standard (RPS) alternative compliance payments, environmental non-compliance penalties, or the sale of bonds. Such programs may be more politically viable than cash incentives, and they can even become self-sustaining through a revolving fund mechanism.

Historically, government and utility loan programs have not resulted in large enough cost savings to spur significant solar development in-and-of themselves.[1],[2]  One explanation may be that until recently,[3] the federal 30% solar tax credit law stipulated that subsidized energy financing—financing provided under a Federal, State, or local program a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy—is to be excluded from eligible project expenditures before calculating the credit. This means that any amount of the installed cost financed under a government loan program was not be eligible for the federal tax credit. Now that the restriction has been lifted and acquiring financing via private credit markets may be more difficult, government-subsidized loans may become a more important policy tool for supporting solar development.

It is noteworthy that over the past few years, a number of creative private-sector financing options have emerged for non-residential systems (including non-taxed entities), such as leasing structures and third-party power purchase agreements (PPA).[4]  One study found that in 2007, of the national commercial and institutional solar market, an estimated 50% of installed capacity was developed under PPA agreements, up from 10% in 2006. The share of PPA-financed projects was projected to grow to 65-75% of the market in 2008.[5]


Status & Trends

More than two dozen states offer loans that may be applicable to solar projects. The majority of these programs are intended primarily for energy efficiency improvements, but solar may also be eligible. Funding for loan programs originates from a variety of sources. In New York and Rhode Island, for example, the state’s public benefits fund supports the loan program. North Carolina and Maryland use oil overcharge funds,[6] and Montana uses air quality penalties collected by the state’s Department of Environmental Quality to create revolving loan programs. Oregon’s program relies on the sale of bonds to finance small-scale energy projects.

About a third of the programs target the non-profit and/or public sector, including local government buildings and schools. The handful of state loan programs targeting renewables or distributed generation exclusively, such as those in Vermont and Connecticut, are intended for non-residential sectors, with the exception of Iowa’s loan program, which is available to individuals and organizations alike. For these renewable energy programs, maximum loan amounts tend to be in the $1 million range or are determined on a case-by-case basis. The interest rate and repayment terms usually vary by project.

The residential sector is eligible for nearly half of the state programs. For the half-dozen or so states with programs specifically for residents, again, the emphasis is efficiency and conservation projects. Examples include Kansas, Louisiana, and Pennsylvania. These states partner with private lenders in administering the program. The maximum loan is generally in the $10,000 to $30,000 range, with interest rates varying widely and repayment terms ranging from three to 20 years.

In contrast to state programs, utility loan programs usually target the residential sector and are designed specifically for solar installations. There are about 30 utilities—nearly all municipal utilities or public utility districts—that offer such loans. These programs are concentrated in Oregon, Washington and Florida. Repayment schedules vary and are usually determined on an individual project basis, but some offer a repayment term of up to 10 years. Municipal or county programs might consider partnering with a local bank or community economic development organization to secure favorable terms or to structure interest rate buy-downs provided by the municipality.

Experience with state loan programs for renewable energy projects suggests that key features of effective loan programs include:

A recent trend on the local level is to create (or consider creating) a Property Assessed Clean Energy (PACE) financing program to help consumers pay for solar energy systems through a long-term assessment on the customer’s property tax bill or another local bill. More information about this policy mechanism is found in the PACE Financing section of the Solar Policy Guide.

 

Examples

Resources

DSIRE: Summary of Loan Programs for Renewables in the U.S.

 

 

 
Financing Non-Residential Photovoltaic Projects: Options and Implications, Mark Bolinger, Lawrence Berkeley National Laboratory, January 2009.

Property Tax Assessments as a Finance Vehicle for Residential PV Installations, Lawrence Berkeley National Laboratory and Clean Energy States Alliance, 2008.








Footnotes