Tariffed Financing: Need to minimize tenant and low-income customer costs
At a Minnesota Public Utilities Commission planning meeting on May 15, researchers presented findings from the study Tariffed On-Bill Financing Feasibility: Assessment of innovative financing structure for Minnesota (Cadmus, 2019). Unlike a traditional loan, tariffed on-bill financing is structured as a utility investment to be recovered via a tariffed charge paid by the utility customer. The remaining loan balance is tied to the utility meter and if a resident leaves the property, it is transferred to the next resident. The bill savings are intended to be greater than the customer cost, so that the resident is paying less than they would have had there not been an efficiency investment.
Among the study's advisory committee members offering additional insights, CEE's Chris Duffrin shared these comments with the commission:
I appreciate the opportunity to participate in this advisory committee and to participate today.
I will start by saying that tariffed financing could uniquely address the "split incentive" problem: Since a rental property owner may not enjoy the savings from home energy upgrades, it helps to have the tenant pay some amount toward the project, like a copay. This can work well in offerings like green leases in the commercial office market, and there could also be an element that works in a residential/multifamily tenant situation.
But first there are challenges to address for replicating the tariffed financing model.
I would put the challenges in two buckets: One bucket I would label as challenges specific to the Minnesota market. The other I would label as specific challenges with the target market chosen — residential and multifamily.
So far this model has primarily been tried in southern U.S. rural areas that are different from Minnesota in four important ways:
They have high cooling loads and low heating loads.
The heating loads are predominantly electric heating loads.
They have poor housing stock which has rarely received energy efficiency improvements. In that context, loan numbers work well when you in roll two very cost-effective measures: installing light bulbs and sealing duct work in attics (because they don’t tend to have basements in the South).
Energy efficiency is not treated as a resource in the rural South, so utilities are not pursuing energy efficiency investments as a cheaper way to meet overall customer and system needs. Tariffed financing provides utilities with an opportunity for customers to pay the full cost of energy efficiency, and also pass those costs onto future customers as well.
Here in Minnesota, we have the opposite in all respects.
We have high heating loads, and those heating loads are supplied predominately by natural gas, which is cheap. The measures we finance are a little more expensive in part due to labor costs and in part because our construction methods have addressed some of the lowest hanging fruit (like having duct work run through basements). Our very low-cost measures, like light bulbs, are free and definitely not something we would finance. And finally, our utilities do treat energy efficiency as a resource and they pay for a portion of the upgrades.
So a lot of the numbers for tariffed financing don’t work so well in Minnesota. Two exceptions for which the numbers generally do work better in Minnesota are in electric-heated homes where the cost of heating fuel is much higher, and in very underinsulated homes, as the study is right to point out.
But to my knowledge, there has never been a natural gas version of this kind of program anywhere in the country because, on the whole, tariffed financing doesn’t pencil out very well where natural gas is the primary heating source.
Residential and Multifamily Market
Specific to the residential and multifamily market, I would add three more challenges:
To ensure that monthly payments amount to less than estimated savings, these programs stretch payments over a long period of time. So measures we would normally finance over five years are instead financed over 15 years, which leads to more risk for the lender and far bigger interest payments for the borrower — increasing overall costs significantly.
Savings are hard to guarantee in residential properties so we cannot say with certainty what any one house will save, and guarantee that for a current or a future occupant. This causes a problem with transferring the tariff (and the debt) to a future occupant.
We don’t want tenants or low-income customers to pay significantly more for improvements financed through 15-year loans, which is why those customers should receive these services for free or very low cost.
So at least in the form it's been implemented in other parts of the country, this financing model presents serious challenges for replication here in Minnesota.
I really like how this initiative has shed light on how energy efficiency programs currently underserve the multifamily and rental market. That is true and programs should be designed (or redesigned) to better serve this market. But I would start with assessing the problems of serving that market, rather than start with a specific solution.
Elements in this model could be good additions, but we should seek solutions that maximize Minnesota's Conservation Improvement Plan investments, that minimize tenant and low-income customer costs, and that will work in both a financial sense and a practical sense for our state.
Perhaps there could be an opportunity to do a small-scale pilot of tariffed financing in the near future, so all stakeholders can see how the numbers would play out and could help inform future multifamily efficiency programs.
Tariffed On-bill Financing Feasability (Cadmus, 2019)
Minnesota Public Utilities Commission