The Limits of Financing for Energy Efficiency

Merrian Borgeson, Mark Zimring, Charles Goldman                                          
Lawrence Berkeley National Laboratory


States and utility regulators are increasingly adopting aggressive energy efficiency targets for existing buildings. To achieve those goals, utilities and governments are increasing their reliance on programs that improve the energy efficiency of the entire building, instead of focusing on single measures or end uses (e.g., lighting). These more comprehensive programs typically require customers to pay a significant portion of the improvement costs. In this environment, financing has been put forward as a tool that can drive investment in comprehensive improvements where the energy savings yield cash flows in excess of loan interest and principal payments.

This "financing is the solution" view is reinforced by the negative cost bars for many efficiency improvements on the McKinsey cost of carbon abatement curve, and the refrain that efficiency is the "low hanging fruit" or even the "fruit on the ground". The narrative is attractive to program administrators and state regulators concerned about the potential short-term impact

on utility rates of meeting aggressive energy efficiency targets. It is also attractive to policymakers struggling with the reality that program budgets are a small fraction of the overall efficiency investment needed to achieve our public policy goals (e.g. reducing the cost of serving energy consumers, easing congestion on the grid, minimzing environmental impacts, equitable access to efficiency opportunities). While this idea – that financing can deliver the long-heralded low hanging fruit of energy efficiency in buildings – is intellectually appealing, financing as the most important element of program design strategy has not been widely substantiated in over 25 years of experience with financing programs.

The reality is far more complex. There are individuals who are debt averse, or can’t (and often shouldn’t) qualify for credit, or would rather spend available capital on more compelling investments. There are businesses, governments, and institutions that have no debt capacity, or that have replaced their lighting already and aren’t interested in efficiency investments with more than a two or three year payback, or that don’t have staff available to manage the work. In some regions of the country the lowest hanging fruit has already been plucked. In other regions the climate or low energy prices make the case for aggressive efficiency more challenging without a long-term view that considers efficiency’s overall benefits, public and private. This challenge is magnified in some regions where there isn’t a trained workforce and a developed energy efficiency services sector to provide an attractive package of measures. Even for those motivated to invest in efficiency, the transaction costs of making these improvements can be high.

The financing gap, to many, seems like a "solvable problem" that can be addressed with politically attractive ideas like public-private partnerships and private sector innovation. The literature on energy efficiency often lists "high first costs" as a key barrier to investment (IEA 2008; Jaffe & Stavins 1994). In our experience examining efficiency programs across the country, lack of financing is seldom the primary reason that efficiency projects do not happen. Financing is only useful once the "product" has been sold to the customer, just as a car loan can only be appealing once you want a car (and then only if there are no better payment options available). Financing cannot address the range of challenges to scaling energy efficiency investment – barriers which include information and hassle costs, split incentives, performance uncertainty, and lack of monetization of public benefits (Golove & Eto 1996, Blumstein et al. 1980). In a world of limited program budgets, program administrators sometimes face a zero-sum choice between allocating funds to supporting financing and allocating funds to approaches designed to overcome a broader set of efficiency barriers. In this paper we explore a set of questions to tease out when financing can be a useful tool, and attempt to highlight some of the limitations of financing to help policy makers and program administrators decide how to allocate resources. These questions are:

  • • Can financing increase the leverage of public funds?
  • • Can financing motivate demand for energy efficiency?
  • • Can financing expand access to energy efficiency?

Can Financing Motivate Demand for Energy Efficiency?

Energy efficiency programs that have been successful in reaching significant portions of their target markets have typically offered large financial incentives that covered 50 percent or more of the project cost (Fuller et al. 2010). With limited public funding, efficiency programs are tasked with motivating millions of households and businesses to spend thousands of dollars on unfamiliar investments. There are good reasons that people aren’t making these improvements, and overcoming these investment barriers is a difficult task at anytime, and even more daunting in an bad economy.


Programs that have successfully achieved relatively high levels of participation by offering financing in lieu of rebates have largely funded improvements like new equipment (e.g. boilers, HVAC systems) in situations where old equipment has failed or needs replacement. Even these programs, which have the advantage of funding improvements familiar and vital to most customers (as opposed to air sealing, insulation, duct sealing, etc), are struggling to achieve scale above one percent of the population annually, and there is an open question about both the additionality of the investments being made and whether the implicit subsidies being allocated to reduce interest rates might be better spent on different types of customer incentives. For example, in Pennsylvania, the Keystone HELP program offers 2.99 percent to 8.99 percent financing to residential customers depending on the comprehensiveness of energy improvements. The program has averaged several thousand projects per year, with loans funded by the state treasury. The PA Treasurer is now struggling to sell this loan pool to investors without offering an enhanced interest rate (e.g. a rate higher than that being paid by program participants) or overcollateralizing the loan pool, both of which increase the cost of offering the program.

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