Understanding On-Bill Financing
On-bill programs provide a mechanism whereby the upfront cost of energy saving improvements and equipment is funded by an electric utility or a third party financier, and ratepayers are able to pay down the cost of these through a monthly payment on their electric bill, using a portion of the savings that were achieved as a result of the improvements. Every member-owned electric cooperative can invest in energy-efficiency upgrades to the homes and businesses it serves, benefiting members with:
- No money down
- A lower monthly electric bill
- A more comfortable home or business
The Benefits of Utility-driven Financing Programs
The advantages of utilities providing financing include expanded access to capital for ratepayers at all income levels and performance-based repayment schedules that align the monthly payback with the projected energy savings achieved. This creates a low- to no-cost opportunity for the ratepayer — including homeowners, renters and businesses. By shifting the upfront costs of energy saving improvements to the utility, on-bill financing makes improvements more accessible and affordable to ratepayers.
Differentiating between On-Bill Financing and On-Bill Repayment/Recovery
On-Bill Financing (OBF) is an energy efficiency retrofit finance mechanism whereby the upfront cost of energy saving improvements and equipment is funded by the electric utility, and ratepayers are able to pay down the cost through a monthly payment on their electric bill. Under this structure, the utility can provide financing in the form of a loan to the customer or they can categorize the funding as a tariff on the customer’s bill.
A Tariff versus a Loan
A tariff is a voluntary program that cooperative utilities can offer their customers. Tariffs can be applied to a number of uses and programs. In this case, an on-bill financing tariff (1) allows the utility to pay for energy efficiency upgrades that provide immediate savings on the member’s electric bill, and (2) allows the utility to recover its costs through a fixed charge on the bill that is less than the total estimated savings.
A key distinction of the tariff is that it is not categorized as a loan to the customer, therefore, it does not add to the debt of the property owner. The investment in energy savings is tied to the meter of the physical property and it is transferrable with the sale of the property. A notable benefit of this model is that it can be utilized by renters and is more easily accessible for customers with limited credit or low credit scores.
On-Bill Repayment also referred to as On-Bill Recovery (OBR) provides the same service and, typically, follows the same process as On-Bill Finance, but capital is provided and loans are serviced through a third party such as a bank or credit union. This approach does offer benefits to the utility by outsourcing the loan servicing and underwriting tasks to a third party, reducing the workload of the utility. Key distinctions of OBR include the following:
- In the repayment model the credit worthiness of a ratepayer is determined by the third party lender, which can limit the range of customers who can qualify to participate. The net effect is a reduced access to financing for low income and fixed income ratepayers.
- The financing is categorized as debt.
Understanding the Process
A co-op’s efficiency experts identify which energy-saving upgrades will be most cost effective for a home or a business. For co-op members with high bills, undertaking efficiency improvements such as insulation, air sealing, heat pumps and lighting upgrades have been shown to generate average energy savings of 25%.
A co-op member then chooses which improvements to make and selects a qualified contractor, often from a list of pre-approved contractors provided by their utility. The electric cooperative or the third party lender pays for all the work up front, recovering the cost with a stable charge on the member’s monthly bill that is less than the estimated savings from the efficiency improvements. The result: participants get immediate savings on their bill while increasing the comfort of their home or business.