low-cost financing: overview
Why is it important to provide financing?

Green building techniques have been shown to reduce operating and maintenance costs for new and existing buildings, generating significant cost savings over the life-cycle of a home. The payback period -- i.e., the length of time over which energy-efficiency retrofits or construction techniques pay for themselves through utility cost savings -- varies widely and depends on a variety of factors, including the initial condition of the building (for existing homes), the cost of purchasing and installing specific upgrades, and energy price levels after the upgrades have been completed. In general, however, the typical payback period for general energy-efficiency improvements has been estimated at three to ten years, while comprehensive "whole house" improvements have been estimated to pay for themselves over a five to twelve-year period.

Despite the long-term cost effectiveness of most energy-saving interventions, these measures often carry high up-front costs -- sometimes called "first costs" -- that present a barrier to their widespread adoption, particularly among low- and moderate-income families and developers and owners/managers of affordable housing, who often operate on a very narrow cost margin. Specialized financing products that account for the longer-term benefits associated with energy-efficiency upgrades help to spread these first costs over a longer time period, making upgrades more affordable to borrowers who may have limited up-front capital. The availability of these products may mean the difference between making or not making the type of comprehensive changes that significantly reduce home energy consumption.

As an additional benefit, some of the products described in this section help to address an obstacle known as the "split incentives" problem. The split incentives problem describes a scenario in which the party responsible for covering the costs associated with energy-efficiency improvements does not directly benefit from those improvements -- for example, owners of rental properties with individually-metered units would have responsibility for

Portland Place, Minneapolis MN -- Photo courtesy of LHB, Inc.
paying for upgrades but would not realize the benefits from lower utility costs. Similarly, homeowners that expect to move before they can fully recoup the cost associated with energy-efficiency upgrades may lack the incentives to do them. Lacking a financial incentive to reduce utility bills through potentially costly energy-saving measures, home- and property-owners may avoid making any upgrades. Effective financing products can help to minimize the extent to which split incentives stand in the way of energy efficiency. (Learn more about split incentives in the assisted rental stock.)

What tools are available to finance energy efficiency?

Up until the recent economic downturn, homeowners looking to finance energy-efficiency improvements may have taken out a second mortgage or a home equity line of credit -- products that may be much more difficult to access in the wake of the recent mortgage foreclosure crisis. Personal unsecured loans and credit cards have served as another financing option to cover the cost of energy-efficiency improvements; however, today especially many families cannot qualify for or afford these loans, which often carry relatively high interest rates and strict lending criteria. The tools described in this section, which in many cases have been modeled on traditional lending instruments or payment processes, provide options for financing investments in energy efficiency under favorable terms. (Click here for more information on federal funding sources for energy efficiency.)

For example, energy efficient mortgages (EEMs) build on traditional home mortgages by factoring into underwriting standards the cost of energy-saving improvements and the anticipated cost savings associated with those upgrades. Property Assessed Clean Energy (PACE) financing and on-bill financing models add an assessment for implementation of energy-efficiency measures to existing municipal or utility bills, lengthening amortization schedules to increase affordability, streamlining repayment and keeping the responsibility for paying for upgrades with the property, rather than the household. Many communities also offer low-cost loans or grants to reach low- and moderate-income families and the developers and property owners that serve them.

The widespread adoption of any of these financing tools depends in large part on the availability of reliable data on pre- and post-retrofit energy usage, which enables property owners and investors to have a high level of confidence in projected performance following implementation of various energy-saving measures.

In the absence of a representative dataset, lenders and other financial institutions may view financing tools that support energy-efficiency upgrades as too risky. Learn more about benchmarking energy use.
In 2010, the National Housing Conference hosted the Partners in Innovation preservation forums, a series of three regional forums focused on strengthening and supporting affordable rental housing preservation efforts through innovative partnerships, policy development, and legislative reform. The regional forums took place in Boston, MA; Portland, OR; and Denver, CO in 2010.

View the following presentation on tools to finance energy efficiency from the Partners in Innovation: Preserving Affordable Rental Housing Through Energy Conservation in Boston on April 14, 2010.

Where is this most applicable?

As with traditional financing products, the tools discussed in this section may be useful to families in new and existing homes in communities across the country. The geographic diversity of the organizations pioneering many of these programs illustrates their broad applicability.

Learn more about low-cost financing for energy efficiency

Go back to learn about other policies that improve residential energy efficiency