Loans and Credit Enhancements

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• Examples from the Field
• Program Characteristics
• Reaching Underserved Communities and Addressing Consumer Protections
• Roles and Responsibilities
• Getting Started

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Consumers, businesses, and nonprofit organizations commonly use traditional financing products such as loans to stretch the payment for clean energy improvements over several years. A loan involves borrowing money to fund the purchase of specific equipment or improvements. For consumers who wish to use a loan to finance clean energy improvements, they may pursue traditional financing options such as personal loans, credit cards, taking out a second mortgage, refinancing an existing mortgage, or using a home equity loan.¹ Consumers may obtain better rates through clean energy loans supported by government policies and programs,² such as energy efficiency mortgages. States, local governments, or utilities may leverage taxpayer or ratepayer funds to provide more favorable rates and terms than traditional financing to finance clean energy improvements.

Credit-enhanced lending is a public-private partnership whereby governments use funds to encourage private lenders, or sponsors, to offer attractive loans to select markets. The sponsor, typically a financial institution (e.g., a bank or a credit union), may fund, originate, and service the third-party loans. The loans are similar to standard loan products but have more desirable terms, such as lower interest rates or more flexible underwriting standards. Credit enhancements can be used to support loan programs administered by state and local governments and other clean energy finance programs and entities covered in this Clean Energy Financing Toolkit for Decisionmakers, including green banks and revolving loan funds (RLFs).

Credit enhancement can be used as a tool to mitigate barriers to loans. For example, lenders may ease criteria to lend to individuals or businesses with low credit scores, low incomes, or high debt-to-income ratios, which are common barriers for low- and moderate-income (LMI) communities.³. These lending tools serve to make clean energy financing more accessible for underserved communities (constrained by income and other barriers), while also incorporating clean energy investments, such as energy efficiency upgrades and renewable energy installations, into construction and remodeling projects.

Government funds typically serve to mitigate the financial institution’s risk or borrowers’ risk. Two ways to do this include:

• Loan loss reserves (LLRs) – Local and state governments commonly use LLRs to provide partial risk coverage to lenders—meaning that the reserve will cover a pre-specified amount of loan losses. For example, an LLR might cover a lender’s losses up to 10% of the total principal of a loan portfolio.
• Interest rate buy-down (IRB) – Local and state governments buy down the market interest rate of a loan by making an upfront payment to the lender. This in turn lowers the interest that the borrower pays. This funding strategy reduces the lender’s risk and increases the borrower’s available cash. IRBs can help local and state governments gain more attention for the loan program, reward early participants in a newly launched program, and build market demand for new financing mechanisms.⁴

Credit-enhanced loan programs may extend the length of time (i.e., number of years) the borrower has to fully repay the loan and allow for unsecured loans, which can be larger in the residential sector.⁵ In some cases, credit enhancement programs eliminate or increase the loan-to-property value ratio requirement to allow for lower rates and borrower contributions.⁶

Energy project loans generally share the following key features:

• They involve borrowing money for a specific period to fund clean energy improvements.
• They require that the borrower pay the principal back to the lender, frequently with interest payments for the term of the loan.
• They often have lower interest rates and longer terms than market-rate loans.

Credit enhancements generally share the following key features:

• They mitigate the risk to financial institutions by providing a guarantee that the lender’s losses are capped up to a specified amount or by providing upfront payments to lenders in exchange for a lower interest rate.
• They can be used to lower the barriers to loans for clean energy upgrades, particularly for those borrowers that do not have the upfront capital to fund the upgrades.

Loans may be administered by the following entities:

• State agencies may establish funds or loan programs. States can administer loans themselves or partner with third-party financial institutions to offer loans with preferred terms to qualified borrowers.
• Local governments, like states, can develop loan programs. Like state governments, local governments may provide direct loan products to consumers through a RLF structure, or can partner with financial institutions (e.g., credit unions or banks) to offer qualified borrowers specific terms.
• Third-parties or private lenders, such as financial institutions, can offer loan products to facilitate the expansion of clean energy technologies, such as solar or energy efficiency upgrades. Private lenders may target areas where consumers receive specific benefits (e.g., rebates or credits) for clean energy improvements.

Credit enhancements may be administered by the following entities:

• Local and state government agencies can establish a credit enhancement fund or program to absorb loan risk and encourage private lenders to provide attractive loans to commercial, industrial, residential, or nonprofit sectors to support energy efficiency and renewable energy markets or products.
• Third-parties or private lenders can issue loans for clean energy improvements and are responsible for administering the loans on behalf of the government funder. Lenders often work with local and state government agencies to ensure that financial tools are designed to target key sectors (e.g., LMI communities) successfully.

Examples from the Field

California GoGreen Home Energy Financing Program (GoGreen Home)

• Launched in 2016, GoGreen Home provides financing to California residents of single-family homes, townhouses, condos, duplexes, triplexes, fourplexes, and manufactured homes for energy efficiency improvements.
• Program participants can use affordable loans to make investments in energy-efficient heating, ventilation, and air conditioning (HVAC) systems, heat pumps, cool roofs, appliances, insulation, and windows.
• To support a broader base of borrowers, GoGreen Home offers a credit enhancement that enables participating lenders to offer lower rates, longer payback terms, and higher loan amounts.
• At the end of 2020, the program has made more than a thousand loans totaling more than $17.5 million, with 57% of the loans going to properties in LMI Census tracts.

Nebraska’s Dollar and Energy Saving Loans Program

• Established in 1990, the Dollar and Energy Saving Loans program is a $37-million RLF that has supported over 28,000 energy efficiency projects across sectors.
• The loan fund coordinates with over 250 lenders to co-invest no-interest funding with market-rate loans. This credit enhancement results in blended rates to borrowers up to 5% as of 2022.
• Home and building improvements can be financed for up to 15 years and appliances for up to 5 years for appliances (as of 2022).

Program Characteristics

Here are the typical characteristics of revolving loan funds.

Program types	Loans; loan loss reserves; interest rate buy-down
Target sectors	Commercial; Industrial; Residential: Homeowners; Residential: Multifamily; Public; Nonprofit
Potential funding sources	Bonds; public funds; ratepayer funded; private lenders; utility
Security required of borrower	Unsecured for smaller loans (e.g., $7,500–$20,000)
Repayment mechanism	Monthly loan payment (to government lender or third-party program administrator)
Funding needs	Typically, sponsors must provide a high level of funding to make the program successful for as many participants as possible
Enabling legislation requirement	May be required

Reaching Underserved Communities and Addressing Consumer Protections

When developing a financing program, considering the needs of underserved communities early in the process can help decisionmakers create a comprehensive financing program and incorporate consumer protections. Decisionmakers can evaluate how and to what extent marginalized communities and considerations of social equity have been included in the policymaking process for developing a financing program by considering the following questions:⁷

• Have marginalized communities participated meaningfully in the policymaking process?
• Does the policy help address the impacts of inequality or inequity, or does it widen existing disparities?
• What are the barriers to more equitable outcomes?
• How will the policy increase or decrease economic, social, and health benefits for marginalized communities?
• Does the policy make clean energy more accessible and affordable to marginalized communities?

Many of the financing programs covered in this Clean Energy Financing Toolkit for Decisionmakers resource can provide specific benefits to underserved communities through increasing access to clean energy (e.g., lower energy bills, upgraded equipment, improved comfort). However, financing programs that place additional debt on consumers could place LMI households at an increased risk if adequate consumer protections are not in place. For example, consumers could face penalties for failing to repay program funds, including having their power shut off, adverse credit scores, and in some instances losing their homes. Decisionmakers can implement consumer protection frameworks to address these concerns, including increasing awareness, analyzing the applicant’s ability to pay, and requiring disclosure of financing costs. Considerations for consumer protections are specific to each program.

Credit enhancements, such as loan loss reserves programs and interest rate buy-downs, can reduce barriers for borrowers by lowering the interest rates for loans, making them more accessible to a broader range of borrowers, including LMI households. Lenders can modify or remove credit check requirements to make loan products more available to LMI borrowers. Loan programs should implement consumer protection regulations to ensure that there is proper disclosure of key information so that all borrowers are aware of the costs and payments associated with obtaining financing and any consequences for non-payment.

Roles and Responsibilities

Clean energy loan programs are established frequently by state and local governments. A variety of government entities can oversee loans. Oversight of these financing tools is often a core function of green banks and RLFs, where they have been established. In developing loan programs, state governments will need to establish eligible technologies and sectors, determine credit enhancements such as a loan loss reserve and/or an interest rate buy-down, develop standardized documents, terms, and identify financial providers (e.g., credit unions and community development financial institutions). State and local program administrators create marketing materials and develop plans to increase public awareness of the financial tools. State and local governments should also develop procedures for monitoring payments, reviewing existing loans, and auditing existing loans to ensure that they are compliant with established standards. State and local agencies often work with financial institutions and third-party organizations to help administer the program.

Typically, when programs are established at a statewide level, local governments’ primary role is to partner by marketing the financial opportunities to its residents and businesses. If a local government is developing a loan program, it would be responsible for such activities. Local governments may assist programs operated by third parties or state agencies by providing legal documents (e.g., property titles, liens).

Utilities may be authorized to use ratepayer funds for the administration of these programs and to provide marketing, education, and outreach. For example, the California Alternate Energy and Advanced Transportation Financing Authority administers the Hub for Energy Efficiency Financing, which provides credit enhancements through a loan loss reserve fund.⁸ The Hub is supported through ratepayer funds from investor-owned utilities. In addition, utilities can advertise third-party credit-enhanced loans to borrowers.

Other third parties, such as financial institutions, may establish their own loan programs for clean energy. In these instances, third parties would be responsible for the actions described previously.

Getting Started

State and local governments should consider these steps and best practices during the design, approval, and management of a loan or credit enhancement program:

• Establish program rules and credit evaluation processes that loan providers can use to offer and approve financing for target sectors and project types.
• Develop an initial program budget for credit enhancements and program administration, then determine potential sources of funds.
• Determine eligible technologies, project types, sectors, and appropriate financing terms.
• Engage with key stakeholders to inform the development of loan and credit enhancement programs.
• Create an action plan with organizational goals, priorities, and constraints for implementing a credit enhancement program, and establish fair and appropriate credit evaluation standards to make the program available to as many qualified consumers as possible.
• Incorporate robust consumer protections.
• Determine financial market needs for enhancement, how to provide support, and potential lending partners that will serve as a trusted network. Determining an approach to credit enhancement, funding levels, and repayment processes will provide input for the program budget.
• Create an enhancement fund for projects that is large enough to diversify and reduce risk for lenders.
• Evaluate service and financing providers to create a vetted list that consumers can use with confidence.
• Determine how to reach out to consumers and the time and resources needed to ensure they are aware of the program. Ensure fair marketing and sales practices from service providers by reviewing and approving their messaging, especially for LMI consumers.
• Describe the program’s potential economic and environmental benefits, depending upon loan volume.
• Monitor the financial markets to identify changes that may make projects or loans less attractive and adapt the credit enhancement as required.

While there are many government institutions that are able to consider these issues and oversee programs for energy project loans, establishment and oversight of these types of programs are typically a core mission for green banks or RLF program administrators.

References and Footnotes

¹ U.S. EPA ENERGY STAR. 2007. Financing Guidebook for Energy Efficiency Program Sponsors.

² U.S. EPA ENERGY STAR. 2007. Financing Guidebook for Energy Efficiency Program Sponsors.

³ National Renewable Energy Laboratory. 2017. Publicly Supported Solar Loan Programs.

⁴ Clean Energy and Bond Finance Initiative. 2013. Reduce Risk, Increase Clean Energy: How States and Cities are Using Old Finance Tools to Scale Up New Industry.

⁵ U.S. Department of Energy. 2010. Structuring Credit Enhancements for Clean Energy Finance Programs. Now Step 4a: Choose Your Program Structure—Credit Enhancements. 

⁶ U.S. Department of Energy. 2010. Structuring Credit Enhancements for Clean Energy Finance Programs. Now Step 4a: Choose Your Program Structure—Credit Enhancements. 

⁷ Governments, agencies, and nonprofits have developed equity lenses and frameworks to ensure that issues of race and equity are incorporated throughout policy-making processes. These questions draw from the following frameworks: Institute for Energy Justice, “Section 2 – Energy Justice Scorecard”; City of Seattle, “Racial Equity Toolkit”; and Higher Education Coordinating Commission, “Oregon Equity Lens.”

⁸ California Alternate Energy and Advanced Transportation Financing Authority, California State Treasurer. n.d. About the California Hub for Energy Efficiency Financing (the Hub).