I have always been fascinated by the enormous potential private markets have to shape the future growth of the building energy efficiency sector. That’s why I was excited when earlier this month I heard that Citi, the leading global bank, along with Renew Financial, specialists in affordable financing for renewable energy and energy efficiency projects, announced a deal to issue $12.58 million in securities backed by residential energy efficiency loans.
This transaction appears to be a huge win for a program called the Warehouse for Energy Efficiency Loans, better known as WHEEL. Founded in 2014 as a public-private partnership, WHEEL seeks to provide homeowners with low-cost financing solutions by facilitating a secondary market for residential clean energy loans. The program works by first buying residential energy efficiency loans that originated in utility or government-sponsored efficiency programs—these loans are then bundled into a security, which, once its aggregate amount exceeds a certain threshold, is sold to institutional investors.
The list of organizations that have collaborated to develop WHEEL is impressive – in addition to Citi and Renew Financial, AFC First Financial Corporation, the Energy Programs Consortium, the National Association of State Energy Officials (NASEO), the Pennsylvania Treasury Department, and the U.S. Department of Energy (DOE) have all been involved in its creation.
The history of WHEEL is a bit murky, but getting this innovative efficiency financing program off the ground appears to have been a long and challenging process. It’s been about three years since WHEEL received DOE’s blessing, which program stakeholders thought at the time, “removes the last significant obstacle to being able to offer an attractive vehicle to which loan program sponsors can sell their loans,” said Keith Welks, Pennsylvania’s deputy state treasurer for fiscal operations in an interview with State & Local Energy Report. However, despite WHEEL’s promise, it took nearly two years from that point to officially launch the program.
When WHEEL finally launched in 2014, an article in Institutional Investor described the high hopes of the program’s creators–specifically the goal to announce a first issuance of approximately $50 million in asset-backed securities in the fall of 2014. The actual issuance of $12.58 million in the spring of 2015 fell well short of this goal.
What has held WHEEL back? Perhaps it’s a low number of residential energy efficiency loan originations from utility or government-sponsored efficiency programs, or maybe it’s a persisting lack of interest in building energy efficiency from institutional investors. It’d be helpful to know more about the obstacles these pioneering organizations have faced and some of the potential ways to get around them.
On the commercial side, one group working to make it easier for investors to loan money for building energy efficiency projects is the Investor Confidence Project (ICP), an initiative of the Environmental Defense Fund. ICP tackles this problem by providing a standardized and streamlined process for evaluating project performance and assessing risk. In 2013, ICP used its standard protocols for the first time to leverage financing for a $2 million commercial retrofit. The retrofit was financed by Connecticut’s green bank under a property-assessed clean energy (PACE) program, another energy efficiency financing tool that’s gained significant traction recently. We’ll keep our eye on ICP to see if and when they can garner more interest from institutional investors and how they do it.
Getting back to WHEEL, what we do know is that it’s a market mechanism that seeks to alter the status quo, and thus it’s no surprise that the program has faced adversity. But even though WHEEL faces an uphill battle to achieving scale, it’s still a positive development for the sector and the organizations supporting the program should be applauded. Issuing the first ever asset-backed security of unsecured residential energy efficiency loans may not sound exciting to many outside finance and home energy efficiency circles, but for those seeking new ways to access money for improving the built environment, it’s an achievement worth noting. More innovative models such as WHEEL are needed to tap into the enormous capital pool available in the private sector and thereby enable the industry to grow by leaps and bounds.