Bonds might fund solar gear

The explosion of solar photovoltaic installations in Hawaii has put the state near the top nationally in terms of PV electricity generation on a per capita basis.

But the boom has left behind a sizable segment of the population that, for a variety of reasons, has not been able to tap Hawaii’s abundant sunshine as an energy source.

Among the biggest impediments keeping residents and businesses on the sidelines are costs and the conflicting interests of landlords and tenants regarding who should pay for the systems. The issues are ones government leaders and renewable energy proponents have grappled with over the past few years without making much headway.

That could change, however, if state officials are successful in their efforts to create a new financing structure aimed at making PV systems and energy efficiency improvements affordable to a wider audience.

At the heart of the initiative is legislation that would authorize the issuance of "green infrastructure bonds" to provide needed capital. Early indications are that the bonds would be well received by the capital markets and would allow the state to borrow at interest rates below what it currently pays on state revenue bonds.

Proceeds from the bond sale would be used to make clean-energy loans to residents and business owners, who would repay the loans with the savings on their electricity bills. Called "on-bill financing," the program would require approval by the state Public Utilities Commission.

The bond issuance would be overseen by the state Department of Business, Economic Development and Tourism. The bond structure was conceived by DBEDT Director Richard Lim, who worked as a banker for three decades before joining the Abercrombie administration.

"Let’s face it, solar has been for the more advantaged," Lim said. "We’re targeting the underserved market, renters, nonprofits, churches and homeowners who don’t qualify for solar."

Getting PV panels on the roofs of rental units has been difficult because renters generally don’t want to foot the bill for a system they won’t own. And landlords are reluctant to pay for a PV system if the energy savings will accrue to the tenant.

Homeowners and business owners who can’t afford the upfront cost of a PV system have two main options: borrow the money from a bank or enter a lease agreement in which a third party owns the system and leases it to the customer for a monthly fee.

However, most banks and leasing companies have taken a cautious approach to financing solar projects, turning away customers with less than exemplary credit, Lim said. "The typical solar lease, which is a huge part of the market right now, requires at least a 700 FICO score. If your credit score is 700 or above, you pretty much get the lease. Below 700, sorry."

Nearly half of consumers have a FICO score, the standard credit score used by lenders, below 700.

The caution on the part of lenders stems largely from the lack of a track record for these types of loans and leases, Lim said. DBEDT’s challenge was to devise a structure that would give lenders more confidence the loans would be repaid.

Enter on-bill financing.

"On-bill financing is a powerful mechanism to incent repayment. You pay your utility bill before you pay your mortgage," Lim said.

Jack Bernard, a former Wall Street bond trader who now helps run an Oakland, Calif.-based energy initiative, predicted the green bonds will be a hit in the capital markets.

"Will investors want these bonds? Absolutely. They’ll be dying to get into the issuance," Bernard said.

The bonds most likely will be rated triple-A, which means they will be an easy sell to pension funds, insurance companies and other institutional investors whose portfolios are often required to have highly rated investments, said Bernard, executive director of Renewable Funding.

The proposed green bonds share some characteristics of a "rate-reduction bond." Those bonds were created in the mid-1990s as a way for utilities to recover the cost of power plants and other capital equipment. Utilities that issue rate-reduction bonds repay bondholders by charging customers a fee on their electric bills. There has been about $40 billion worth of rate-reduction bonds issued, most of which are rated triple-A, Bernard said.

The green bonds would be structured similarly, except that instead of using the proceeds to pay for power plants, the bonds would be used to create a fund from which utility customers could borrow to pay for a wide range of clean-energy improvements. The customers would repay the loans over time with the savings on their electric bills. Those repayments would be used to replenish the green infrastructure fund.

If the Legislature approves the green bond program, it would be the first of its kind in the nation, DBEDT’s Lim said.

"We’re using features of the rate-reduction bond, but this type of structure has never been used before," Lim said. "It’s been used for industrial purposes, and we’re now proposing to use it for consumers."

Cisco DeVries, president of Renewable Funding, praised DBEDT for the "innovative" approach being proposed in the green bond program.

"The segment of the population that this program will reach is larger than most people realize," DeVries said. "What Richard (Lim) and his people have put together is a way of marrying the needs of the energy world and the financing world. Tremendous credit should go to the folks in Hawaii," he said.

Over the past several years, Renewable Funding has focused its efforts on promoting a financing model called Property-Assessed Clean Energy, or PACE. The PACE financing structure allows local governments to raise money through the issuance of bonds to fund energy efficiency and renewable energy projects.

Property owners who benefit from the improvements repay the bonds through property assessments, which are secured by a property lien and paid as a charge on their property tax bill. They are similar to land-secured bonds that have been used by cities to fund construction of roads and sewers.

However, no PACE bonds have been sold to date for renewable energy projects because of concerns of mortgage lenders that the energy loans would have to be repaid before the mortgage if the homeowner defaults. A version of the PACE program was proposed for Hawaii in 2010 but was killed due to similar concerns.

DeVries said Hawaii’s proposed green infrastructure bond program combines the best features of land-secured financing and rate-reduction bonds.

"Those are two tried and true mechanisms that are well understood. It’s like bringing peanut butter and jelly to make a sandwich," he said. "The basic approach is very elegant, and there’s no doubt a lot of jurisdictions around the country will be looking to model it."