Loan Programs

Description

Loan programs may be used to encourage the installation of renewable-energy systems by addressing the financial barrier of high up-front system costs. While loans do not reduce the actual price tag, they help make purchases more affordable by spreading the cost of the system over time. States, utilities and local governments can establish low-interest loan programs to encourage the adoption of solar energy. Such programs can provide lower interest rates, more favorable terms, and lower transaction costs than private lending arrangements. Government agencies and utilities may administer such programs directly or leverage funds by partnering with private lenders.

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

Historically, government and utility loan programs alone have not resulted in large enough cost savings to spur significant solar development.[1],[2] Until a few years ago,[3] the 30% federal tax credit for solar energy stipulated that subsidized energy financing (i.e., financing provided under a federal, state, or local program that typically offers a reduced interest rate to projects designed to conserve or produce energy) must be excluded from eligible project expenditures before calculating the credit. This meant that any amount of the installed cost financed under a government loan program was not be eligible for the federal tax credit.

Significantly, over the past few years, a number of creative private-sector financing options have emerged for both non-residential solar-energy systems (including non-tax-paying entities) and residential systems; these include modern leasing structures and third-party power purchase agreements (PPAs).[4]

Status & Trends

More than 30 states offer loans that could apply to solar projects. The majority of these programs primarily target energy-efficiency improvements, but solar may also be eligible. Loan programs are funded by a variety of sources. In New York, the state’s public benefits fund supports its loan program. Maryland has used oil overcharge funds,[5] 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 smaller energy projects.

About one-third of state loan programs target the non-profit and/or public sector, including local government buildings and schools. Of the handful of state loan programs targeting renewables or distributed generation exclusively, many are exclusively intended for the non-residential sector, with Iowa’s loan program serving as a notable exception. For these programs, the maximum loan amount is generally in the $1 million range or is determined on a case-by-case basis. The interest rate and repayment terms usually vary by project.

Around half of these state loan programs apply to the residential sector. For the half-dozen or so states with loan programs specifically for residents, energy efficiency and conservation are emphasized. Under these programs, states partner with private lenders to administer 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 loan programs, utility loan programs usually target the residential sector and are designed specifically for solar. Around 30 utilities -- nearly all of which are municipal utilities or public utility districts -- 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 programs 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 low interest rate, long repayment term (at least 10 years), and minimal fees;
An easy and concise application process without compromising quality assurance;
A coordinated package of additional incentives;
Coordination with other state programs and relevant stakeholder groups to educate the public about solar technologies and to market the incentive program; and
A mechanism for tracking the details of program use, costs, and energy savings or production to enable program evaluation and improvement.[2]

At the local level, Property Assessed Clean Energy (PACE) financing programs can help property owners 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 DSIRE Solar Policy Guide. Other types of on-bill financing programs are also emerging, but they are not yet widespread.

Examples

The Orlando Utilities Commission, a municipal utility in Florida, partners with the Orlando Federal Credit Union to provide its customers with low-interest loans for solar installations. Customers may borrow up to $7,500 for a solar water-heating system at an interest rate of 0% to 4%, depending on the repayment term, with a maximum term of seven years. Customers may borrow up $20,000 for a PV system at an interest rate of 2% to 5.5%, with a maximum term of 10 years. Loans are repaid over time as fixed payments on customers' monthly utility bills. This program complements the utility’s performance-based incentive program for PV and solar water heating.

Resources

DSIRE: Summary of Loan Programs for Renewables in the U.S. DSIRE, 2012.

DSIRE: Summary of Property Assessed Clean Energy (PACE) Financing Authorization in the U.S. DSIRE, 2012.

Policy Framework for PACE Financing Programs. The White House, Office of the Vice President, October 2009.

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

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

Footnotes

[1]  Case Studies of State Support for Renewable Energy: Renewable Energy Loan Programs, Mark Bolinger and Kevin Porter, Lawrence Berkeley National Laboratory and the Clean Energy Group, September 2002.
[2]  State Financial Incentives for Renewable Energy: Case Studies on Program Effectiveness, Susan Gouchoe, Valerie Everette, and Rusty Haynes, North Carolina Solar Center, September 2002.
[3] The American Recovery and Reinvestment Act of 2009 repealed a previous limitation on the use of the credit for eligible projects also supported by "subsidized energy financing." For projects placed in service after December 31, 2008, this limitation no longer applies.
[4] Financing Non-Residential Photovoltaic Projects: Options and Implications, Mark Bolinger, Lawrence Berkeley National Laboratory, January 2009.
[5]  Oil overcharge funds, also known as petroleum violation escrow funds, came from fines paid by oil companies that violated federal oil price caps in place from 1973-1981. The U.S. Department of Energy identified violations and recovered overcharges for states and other parties.

Disclaimer: The information presented on the DSIRE web site provides an unofficial overview of financial incentives and other policies. It does not constitute professional tax advice or other professional financial guidance, and it should not be used as the only source of information when making purchasing decisions, investment decisions or tax decisions, or when executing other binding agreements. Please refer to the individual contact provided below each summary to verify that a specific financial incentive or other policy applies to your project.

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