"On-Site Renewable Energy and Public Finance: How and Why Municipal Bond Financing Is the Key to Propagating Access to On-Site Renewable Energy and Energy Efficiency"

Wiener, Jason R., Alexander, Christian, Santa Clara Computer & High Technology Law Journal

I. INTRODUCTION

Special tax districts and municipal bond financing are not inherently sexy cocktail party topics. Nevertheless, these obscure and complex systems that leverage public capital to finance public works projects are expanding at a rapid clip into the space of on-site renewable energy project finance. Consumers' energy choices are growing as alternative forms of distributed generation become more cost-competitive. This Article seeks to demonstrate that municipal bond financing for on-site renewable energy and energy efficiency ("RE/EE") projects is uniquely structured and positioned to provide the most equitable access to communities of varied collective means.

II. RENEWABLE ENERGY AND RESIDENTIAL PROJECT FINANCING PRESENTING THE ISSUE OF EQUAL ACCESS

Traditionally, most electricity consumers have a fairly opaque relationship with both the source of generation as well as the system that delivers energy. Obfuscated by systemically complex utility monopolies, the energy generation and delivery apparatus in the United States is heavily regulated. The enormous capital costs associated with increasing generation, transmission, and distribution delivery capacity is shrouded by a regulatory process that parses these billion-dollar numbers into digestible line-item fees on a customer's utility bill.

A new market for distributed energy generation is emerging to site customer-based load capacity in proximity to where the electricity is being consumed. This Article refers to the siting of such RE/EE projects in close proximity to customer load or demand as "on-site." Collectively, these on-site electricity-generating facilities are known as distributed generation.1 Often most visible among the options for on-site electricity generation, solar photovoltaic ("solar PV") installations recall images of shimmering, high technology rooftops that feed electricity into a direct current-to-alternating current inverter, which supplies electricity into the distribution grid when the sun is shining. Until recently, mainstream homeowners disfavored solar PV and other RE/EE improvements because of the relatively high up-front cost associated with their installation. Nevertheless, in the last three to five years, the average customer has gained many financing options that defray much of the up-front cost of RE/EE systems. (2)

The space of on-site RE/EE finance is growing. In the private sector, traditional mortgage lenders and banks offer home equity loans; some generic and others specialized for RE/EE projects. Legislation in several solar PV markets has opened up the market to residential third-party system ownership. Pools of private equity finance the commissioning of systems through a simplified power purchase agreement and system lease. These residential third-party owned system structures are relatively new in most markets except California and vie for a relatively narrow sliver of the incentives available for RE/EE. Many offer no or low up-front cost, thus addressing one of the chief barriers to access. Nevertheless, public sector municipal bond-financed programs, pioneered in the City of Berkeley, offer yet another option for those seeking to make RE/EE improvements on their property.

Notwithstanding the expansion of financing options, there remain systemic obstacles to more widespread access to financing for RE/EE home improvements. Chief among these obstacles are the relatively constrained legal and financial lending parameters inherent in private sector equity-based financing. Private sector equity financing tends to remain available primarily to high net worth or high-income homeowners. These homeowners leverage their home as collateral for a loan that is used to finance RE/EE projects. For average homeowners, access to sufficient equity to obtain such a loan is limited. Further, as credit markets have contracted and the housing market in the United States has declined, most average homeowners lack adequate equity in their home to access financing. Glaring in the absence of financing is the inability of low-income homeowners to access lending through the credit markets to finance RE/EE projects. Thus, the RE/EE movement remains largely stigmatized as an elite technology.

This Article will argue that municipal bond financing is best structured and positioned to offer maximum access to financing for RE/EE projects. Positing the environmental, energy and economic benefits of on-site renewable energy systems, this Article will survey and explain the myriad financing options available and will objectively assess their legal advantages and disadvantages. Further positing that there is a systemic barrier to widespread access to RE/EE, this Article will argue that private sector RE/EE project finance exacerbates this systemic disparity in access. Next, this Article will discuss the legal foundation and history of special assessment districts ("SADs") and municipal bond finance for public benefit projects. Then, this Article will briefly trace this lineage to the expanding progeny of Berkeley's Financing Initiatives for Renewable and Solar Technologies ("FIRST") and will make normative recommendations for expanding property assessed clean energy ("PACE") programs to include environmental justice ("EJ") communities. This Article will conclude that FIRST programs, modified as suggested, hold the potential to address inequitable distribution of RE/EE access.

III. WHERE WE ARE AND HOW WE GOT HERE--A CLOSER LOOK AT RESIDENTIAL FINANCING OPTIONS

A. Private Sector Financing Options--Home Equity Loans

To defray the high up-front cost of residential solar PV systems, traditional home equity loans and their progeny, "green loans," provide a ready source of financing for those with good enough credit to qualify. A home equity loan, sometimes referred to as a home equity line of credit, is a line of credit extended to a homeowner using equity in the home as collateral. (3) Equity is the difference between the fair market value of the home and the outstanding balances of all the loans and other liens on the house. (4) There are two types of home equity loans, a closed-end home equity loan and an open-end home equity loan. (5) While a closed-end home equity loan is for a fixed amount of money where additional money cannot be borrowed, an open-end home equity loan has a credit line set by the lender where the borrower can decide how much and when to borrow against the line. (6)

The most common uses of home equity loans are for home improvements, consolidating debt from credit cards, and paying student loans or unexpected medical bills. (7) Although these may be the typical uses for home equity loans, the use of home equity loans is likely to expand to financing RE/EE improvements for homes as new, clean, cost-saving technologies emerge. While home equity loans provide homeowners the ability to use the equity in their home as collateral, homeowners need to consider the risks involved. The risks involved in obtaining a home equity loan are the attachment of another lien on the home, the reduction of the equity built up in the home, and the possibility of losing the home if the borrower defaults on the loan. (8)

The risks involved in home equity loans also extend to the lenders. If a borrower defaults on his or her mortgage payments, the lender on the home's mortgage has seniority, and the subsequent lender of the home equity loan is junior, in collecting debts owed. (9) During this recession, banks have been hit hard by the rise in default rates on home equity loans. (10) This rise in default rates can be attributed to depreciating home prices. (11) In approaching this situation, some lenders are choosing to walk away from delinquent home equity loans while others are reducing home equity lines of credit to borrowers who are still making payments. (12) Continuing to work with the borrower-rather than walking away-can be easier if the same lender issues both loans. (13) When the same lender has not issued the loans, senior lenders do not tend to be interested in striking a deal until the borrower has a deal in place with the junior lender. (14) Therefore, junior lenders are the ones impacted most by the rise in default rates because senior lenders have priority in settling their loans.

As a remedy to defaulting on the loan, the lender with seniority has priority to the borrower's cash or home, leaving the junior lender to battle for what, if anything, is left. (15) Recent developments show that lenders holding a first mortgage foreclose on and then sell the borrower's house to recoup their money, but that the house sells for less than the value of the mortgage. (16) This loss in value results in a short sale that can leave the lenders of the home equity loan with little or nothing at all. (17) As a result, some lenders who hold home equity loans are opposing short sales or coming to understandings with senior lenders for a certain percentage of a debt in return for agreeing to the short sale. (18) According to the 2007 American Housing Survey, there are over four million home equity loans in the U.S. (19) Rising defaults result in lenders being more cautious in providing home equity loans, which will impact a homeowner's ability to use a home equity loan to finance RE/EE improvements.

As interest in solar energy systems grows, the high up-front cost of installing the system will continue to be an issue. This need has given rise to home equity loans specifically for financing solar energy systems. Some examples include Solar Home Equity Loans or a line of credit from New Resource Bank and SunPower, who teamed up to offer these solar financing options to residents in California. (20) Other financial institutions, such as Wainwright Bank & Trust and AFC First Financial Corp., have created the same type of home equity loans to purchase solar energy, or "green loans." (21) Solar home equity loans differ slightly from traditional home equity loans. Solar Home Equity Loans offered by New Resource Bank, for example, allow homeowners to take advantage of government rebates for RE/EE improvements, pay less on their utilities due to installation of the solar PV system, and generate clean energy. (22) Wainwright Bank's Green Loan[TM] offers a reduced rate home equity loan for solar PV installation, has minimum and maximum loan amounts, and provides the option of three different term lengths. (23) On the other hand, Wainwright Bank's traditional home equity loans have a set minimum and a maximum loan amount of 75% of the appraised value of the home. (24) Wainwright Bank's creation of the Green Loan[TM] as a subset of home equity loans was in response to the energy crisis in California in 2001. (25) More and more financial institutions are providing funding sources for solar PV systems in response to consumers' increasing interest in the installation of such systems.

Other financing mechanisms similar to home equity loans that have developed with the popularity of solar energy systems are energy efficient mortgage loans such as the ENERGY STAR[R] mortgage. (26) The cost of installing solar energy equipment can be incorporated into the mortgage when homeowners secure a mortgage or refinance their mortgage if the lender buys into the program. (27) An ENERGY STAR[R] mortgage has several benefits, including the ability to pay for the investment over the life of the mortgage (typically fifteen or thirty years), low monthly payments, less stringent equity requirements, matching public funds, and the ability to deduct the interest from the homeowner's federal and state income taxes. (28) This allows homeowners to finance their energy efficiency improvements without paying more for financing than they would for a typical mortgage. (29)

While the home equity loan industry continues to adapt to meet the increasing demand for financing RE/EE …

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Publication information: Article title: "On-Site Renewable Energy and Public Finance: How and Why Municipal Bond Financing Is the Key to Propagating Access to On-Site Renewable Energy and Energy Efficiency". Contributors: Wiener, Jason R. - Author, Alexander, Christian - Author. Journal title: Santa Clara Computer & High Technology Law Journal. Volume: 26. Issue: 4 Publication date: May 2010. Page number: 559+. © 2000 University of Santa Clara, School of Law. COPYRIGHT 2010 Gale Group.

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