istock moneyIn Retrofits for All, I described an ingenious plan for extending retrofits to whole neighborhoods of energy-wasting buildings. Today, I want to take another look at one piece of that puzzle: financing.

Energy conservation loans sound eminently reasonable: the loans pay for energy upgrades and, as long as the energy savings are bigger than the loan payments, property owners come out ahead (as do the climate and the local job market). In principle, this model could invest federal, state, or local stimulus dollars well; generate green-collar jobs in the construction trades; trim energy bills for property owners and renters; buttress sagging real-estate values; slash greenhouse gas emissions; and unlock a critical door to economic recovery.

But the challenges to successful conservation loans are daunting.

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  • Yes, potential energy savings in buildings are enormous, but so are the obstacles to seizing them. For starters, lack of upfront capital is only one of several barriers to action: building owners also lack knowledge of efficiency potential and techniques. They don’t know how big the savings will be, so there’s investment risk. They can’t predict future energy prices (auctioned cap and trade with a reserve price would help). To some owners, the savings in absolute dollar terms may not be worth the effort and risk, even if they’re large in percentage terms. In many buildings, owners must pay for building upgrades, while tenants pay energy bills, which erases the incentive for efficiency retrofits.

    Still, access to upfront capital is a substantial barrier. Removing it alone would accelerate efficiency. Unfortunately, private sector financing for energy-efficiency investments in buildings is hard to get. Most banks lack the expertise even in good times to predict energy savings. In the midst of the worst credit crunch since 1929—a crunch triggered by the excesses of creative real estate financing—the chances of a revolution of free-enterprise retrofits sweeping the continent are about as good as, well, the chances of Dow 36,000.

    What about utilities and the public sector? A recent study scoured the continent for conservation loan programs run by such institutions. It makes sobering reading.

    More than 150 public and utility-sponsored residential conservation loan programs operate in the United States, but they serve a relative handful of households. Overall, they reach fewer than 0.1 percent of their potential market each year. In Cascadia, the two largest and most successful such programs—run by electric utility BC Hydro and the Oregon natural gas company NW Natural—no longer operate. Their sponsors cancelled them early this decade, in BC Hydro’s case, because other efficiency programs were more cost effective. What’s more, no retrofit loan programs anywhere pay for themselves fully; all require subsidy.

    A new generation of such programs may address some of these challenges, but certain older approaches hold equal promise. In this and my next post, I explore these models.

    A Seattle-based nonprofit bank has devised a lending model—originally for replacement of leaking septic systems along Hood Canal, of all things—that could finance retrofits for all.

    An affiliate of the Chicago institution ShoreBank, ShoreBank Enterprise Cascadia is legally a community development financial institution—a sort of not-for-profit bank. Eighteen months ago, it began making loans to property owners around Hood Canal to repair or replace faulty septic systems, which are one cause of the canal’s periodic oxygen starvation. Capitalized with $3.5 million from the Bill & Melinda Gates Foundation and $3.5 million from the state of Washington, the septic loan program has now written more than 100 loans.

    The loans amount to 15-year second or third mortgages, and Shorebank Entperprise Cascadia writes the loans on favorable terms to all borrowers. It subsidizes them for low-income families. Because it’s not a bank, it can waive some normal restrictions: for example, if a homeowner’s first mortgage is for 80 percent of the home’s value, and her second mortgage is worth another 10 percent of the house’s value, the septic loan program can still finance a septic replacement. In fact, homeowners can sometimes take septic loans that bring their total debt up to 120 percent of their home’s appraised value.

    The version for the lowest income households carries an interest rate of just 2 percent. What’s more, this interest accrues indefinitely. It only has to be paid when the house is refinanced or sold. For families less strapped for cash, there is a 4 percent interest rate, with 2 percent of the interest deferred until sale or refinance; a straight 4 percent rate; and a straight 6 percent rate.

    The loans terms are generous, because ShoreBank Enterprise Cascadia’s mission—and that of its benefactors—is to replace as many faulty septic systems as it can with the same pool of money, by reloaning the same capital each time a loan is repaid.

    The same loan design, ShoreBank Enterprise Cascadia argues, can apply to energy retrofits as well as to septic upgrades. In fact, it may work better: retrofits generate monthly bill savings that can repay the loan. The nonprofit hopes to launch a $20 million capital pool to fund loans in greater Seattle soon—an ambitious figure for a modestly sized nonprofit but a thimbleful of ocean compared to the need and to the potential scale of a green stimulus.

    Two innovations practiced elsewhere could complement ShoreBank’s. I’ll write about them next time.