Home Performance with ENERGY STAR (HPwES) · 2014. 9. 9. · 1 Program Planning Committee: Program Review Template Program Name: Program Name: Home Performance with ENERGY STAR (HPwES)

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Program Planning Committee: Program Review TemplateProgram Planning Committee: Program Review TemplateProgram Planning Committee: Program Review TemplateProgram Planning Committee: Program Review Template

Program Name:Program Name:Program Name:Program Name: Home Performance with ENERGY STAR (HPwES)

1.1.1.1. PPPPROGRAM ROGRAM ROGRAM ROGRAM DDDDESCRIPTIONESCRIPTIONESCRIPTIONESCRIPTION

The New Jersey Clean Energy Program (NJCEP) is the state sponsor for Home Performance with ENERGY

STAR (HPwES), a national home improvement program for existing homes offered in partnership with

the US Department of Energy (DOE). The program is completely market-based and works with a network

of Building Performance Institute (BPI) accredited private contractors to deliver whole-house energy

efficiency improvements. The contractors work with owners of single-family homes to recommend

improvements to improve energy efficiency, comfort, safety, and durability through an integrated

approach rooted in building science principles. The HPwES Program offers:

• Contractor training, technical assistance, quality assurance, and access to analysis software;

• Customer incentives up to $5,000 per project and zero interest rate loans;

• Contractor incentives and cooperative marketing support; and

• Statewide program marketing.

The NJ HPwES program is considered a “high-volume” sponsor by DOE and is expected to complete

more than 5,000 projects in FY2015. The program targets both single-family homes, both attached and

detached, and small multifamily buildings that are three stories or less. In addition to electric and

natural gas ratepayers, residential customers using oil, propane, and non-investor owned (municipal)

electric are eligible to participate through the use of State Energy Program (SEP) funding.

The program currently involves about 115 active contractors, most of which are heating, ventilation, and

air conditioning (HVAC) contractors. New Jersey is somewhat unique among HPwES program sponsors in

that the contractor base is mostly HVAC contractors; nationally, most HPwES programs primarily work

with insulation and renovation contractors. As a result of this program design choice, the NJ HPwES

program functions as a way to “upsell” customers from the HVAC Programs, WARMAdvantage and

COOLAdvantage, and the equipment rebate programs offered by the natural gas utilities, with

substantial incentives and financing that encourage customers to complete whole-house improvements

when replacing HVAC equipment. The typical NJ HPwES project is quite comprehensive, achieving 25-

30% savings. Projects average about $15,000 before incentives and generally include 1-3 major HVAC

upgrades, most commonly a new furnace, air conditioner, heat pump, or gas water heater, as well as air

sealing and attic insulation.

The HPwES program is achieving strong results in terms of program participation and savings per

project. However, the current program approach is expensive, with an average cost to the program in

2014 of approximately $6,000 per project, of which about $5,400 is spent on customer and contractor

incentives and financing.1 Further, the HPwES program as currently designed only reaches a small

percentage of the home improvement market in New Jersey, as discussed in Section 2.

1 This number excludes spending for commitments, which are funds committed to projects that have started but will complete

in a future program year. When commitments are included, per project spending appears higher.

2

The Market Manager team has developed a set of recommendations for consideration by the Program

Planning Committee. Recommendations fall into two categories: 1) specific recommendations for

implementation in FY2016, and 2) new programs and offerings that would require greater planning to

implement. In the first category, the Market Manager team has developed a set of proposals designed

to increase cost-effectiveness. FY2016 proposals are described in detail in Section 9, Recommended

Program Modifications, and include:

• Increase savings per project by strengthening program requirements for attic insulation and

duct sealing;

• Develop a pilot program offering targeted to building envelope and remodeling projects;

•

• Gradually reduce customer and contractor incentives; and

• Work with financial partners to reduce the program costs associated with the zero interest loan.

Recommendations in the second category are discussed in Section 10, Recommended New Programs,

and include:

• Explore credit enhancements to reduce financing costs and expand access;

• Engage the real estate industry and consider offering a completion certificate or score;

• Consider expansion of subsidized energy assessments with direct installation; and

•

2.2.2.2. PPPPROGRAM ROGRAM ROGRAM ROGRAM GGGGOALS AND OALS AND OALS AND OALS AND OOOOBJEBJEBJEBJECTIVESCTIVESCTIVESCTIVES

The HPwES Program is a full-scale, statewide program that has been offered in New Jersey since 2007.

To date, the HPwES Program has focused on achieving annual targets for participation and electric and

natural gas savings. For FY2015, key objectives include:

• 5,530 single-family and 150 multifamily participants completing HPwES projects;

• Achieve savings of approximately 2,000,000 lifetime Dth and 40,000 lifetime MWh.

In addition to these measureable objectives, the Program also focuses on:

• Market transformation. In alignment with the economic development and job creation goals set

out in New Jersey’s Energy Master Plan, the Program seeks to transform the New Jersey market

for HVAC upgrades by encouraging HVAC contractors to reinvent themselves as whole-house

efficiency contractors. Through this market-based approach, the HPwES Program contributes to

contractor profitability and local economic and workforce development.

• Non-energy benefits. With its focus on comprehensive projects, based on building science

principles, the HPwES Program also delivers a number of “non-energy benefits” to customers, in

addition to energy savings. These benefits include increased home comfort, durability, health,

and safety. For example, HPwES projects often address moisture issues and improve indoor air

quality.

The HPwES Program is designed to address several key market barriers:

• Lack of a contractor base to install whole-house energy efficiency improvements such as air

sealing, duct sealing, and insulation;

• Lack of customer understanding of and demand for the most cost-effective energy efficiency

investments; and

• High up-front cost to the customer for comprehensive efficiency projects.

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The NJ HPwES Program overcomes the first two barriers through a design that takes advantage of the

natural market for HVAC equipment replacements to upsell customers to whole-house investments. The

program design requires that air sealing – a highly cost-effective measure that most customers don’t

know about and most contractors don’t offer – be included in every project. The incentive structure

offers higher incentives for higher total energy savings, which encourages customers to upgrade

multiple HVAC systems at once and include other high-saving measures such as attic insulation.

The up-front cost barrier is addressed through a combination of generous incentives – up to $5,000 for

projects with at least 25% total energy savings – and a zero interest rate loan that allows the remaining

customer cost up to $10,000 to be financed over 10 years. In addition, the high incentives and access to

program financing encourages some customers installing HVAC equipment to “jump” from the lower

incentives they could access through the WARMAdvantage and COOLAdvantage Programs to the HPwES

programs.

While the HPwES Program performs well in terms of participation and savings compared to other HPwES

programs nationally, it is still reaching only a small percentage of the potential market.

WARMAdvantage and COOLAdvantage together complete more than 20,000 projects annually and

engage more than 3,000 contractors, compared to 5,000 projects and 115 active contractors in the

HPwES program. Only a small subset of HVAC contractors are willing to invest in the HPwES model,

which requires quality installation practices and knowledge of building science.

In FY2016, the HPwES Program will strive to improve cost-effectiveness by meeting the following short-

term objectives:

• Increase program savings on a per-project basis;

• Increase HPwES energy savings by 30%; and

• Reduce overall program spending by 20-30% compared to FY2015.

3.3.3.3. HHHHISTORIC ISTORIC ISTORIC ISTORIC PPPPROGRAM ROGRAM ROGRAM ROGRAM RRRRESULTSESULTSESULTSESULTS

All results presented in this section are from internal Market Manager data and official program results

filed in NJCEP annual reports.

The HPwES Program has grown steadily since taking off in 2009. In 2009, the program introduced several

elements to drive demand, including incentives of up to $10,000 per project and zero interest financing.

Program participation spiked and program spending increased dramatically. In 2010, the cash incentive

levels were reduced to a maximum of $3,000, which lead to a significant decrease in participation. In

2011, incentives were adjusted upward to a maximum of $5,000 per project, in order to help the

program recover from the drastic drop experienced in 2010. Since then, the program has continued to

grow steadily.

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Figure 1. NJ HPwES Projects Completed By Year

The majority of program spending is for customer incentives, in the form of rebates and interest rate

buy-downs, as well as contractor incentives. Figure 2 shows the FY2015 program budget by category.

Figure 2. FY2015 Program Budget by Category

Figure 3 summarizes HPwES program results for 2012-2014, as well as budgets for FY2015 and proposed

for FY2016. While there has been steady growth in the number of completed projects, electric and gas

savings have fluctuated from year to year, as have trends in cost per unit of energy savings. Actual

expenditures have generally been well below budgeted levels.

0

1,000

2,000

3,000

4,000

5,000

6,000

# C

om

ple

ted H

Pw

ES

Pro

jects

Program Years

Administration, IT andProgram Development

Rebates, Grants, andOther Direct Incentives

Rebate Processing,Inspections and OtherQuality Control

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Figure 3. Program Results, Budgets, and Proposals 2012-2016

CY2012

(Actual)

FY2014

(Actual)

FY2015

(Original)

FY2015

(Updated)

FY2016

(Proposed)

Projects Completed 3,702 5,302 5,680 5,680 5,000

Projects Committed

To 256 834 NA NA NA

Annual MWH 2,830 4,661 2,042 4,303 3,788

Annual kW 814 1,551 1,318 1,528 1,463

Annual Gas (Dtherm) 50,608 82,585 99,167 84,286 74,195

Gas (MMBtus) Not provided Not provided Not provided 84,286 74,195

Electric (MMBtus) Not provided Not provided Not provided 14,681 12,923

Oil (MMBtus) Not provided Not provided Not provided 109,756 96,616

Propane (MMBtus) Not provided Not provided Not provided 4,542 3,998

Annual MMBtus

(all fuels) Not provided Not provided Not provided 213,265 187,733

Program Budget $39,358,735 $41,478,594 $43,364,475 $43,364,475 $36,072,750

Actual Expenditures $24,813,647 $31,922,365 NA NA NA

Commitments $7,274,848 $8,363,576 Assume $8M Assume $8M Assume $8M

kWh/Project 764 879 359 758 758

Therms/Project 137 156 175 148 148

MMBtu/Project

(electric and natural

gas only) 16 19 19 17 17

MMBtu/Project

(all fuels) NA NA NA 38 38

$/kWh $9 $7 $17 $8 $7

$/Therm $49 $39 $36 $42 $38

$/MMBtu NA NA NA $166 $150

Program Cost/

Completed Project $6,703 $6,021 $6,226 $6,226 $5,615

Note:

Commitments are funds committed to projects that have started but will complete in a future program year.

Data sources:

2001-2012 Program Results, www.njcleanenergy.com/files/file/2001-2012%20Program%20Results.xls

New Jersey’s Clean Energy Program Report Submitted to the New Jersey Board of Public Utilities, FY14,

www.njcleanenergy.com/files/file/Library/BPURpt_NJCEP_4QFY2014_FINAL%281%29.pdf.

FY2015 NJCEP Compliance Filing.

Appendix 1 includes graphs providing more information on the measures installed in the HPwES

program and associated energy savings. Cost-benefit results and projections are discussed in Section 4,

below.

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4.4.4.4. RRRRESULTS OF ESULTS OF ESULTS OF ESULTS OF BBBBENEFITENEFITENEFITENEFIT/C/C/C/COST OST OST OST AAAANALYSISNALYSISNALYSISNALYSIS

Figure 4 presents the cost-benefit analysis results for the HPwES program for FY2015 and FY2016. The

updated analysis for FY2015 includes updated savings estimates and includes savings from unregulated

fuels, which were not included in the original compliance filing.

While the FY2016 HPwES program will not be cost-effective based on the Total Resource Cost Test or

Societal Test, the proposed changes move the program in the right direction.

Figure 4. Cost-Benefit Analysis for FY2015 and FY2016

FY2015 Original FY2015 Updated FY2016 Proposal

Lifetime Net Benefits -

Total Resource Cost Test ($79,290,069) ($73,462,257) ($63,013,842)

Benefits-Cost Ratio 0.11 0.18 0.19

Lifetime Net Benefits -

Societal Cost Test ($77,861,229) ($70,451,050) ($60,363,132)

Benefits-Cost Ratio 0.13 0.21 0.23

5.5.5.5. CCCCOMPARISON TO OTHER POMPARISON TO OTHER POMPARISON TO OTHER POMPARISON TO OTHER PROGRAMSROGRAMSROGRAMSROGRAMS

5.15.15.15.1 Incentive levelsIncentive levelsIncentive levelsIncentive levels

The NJ HPwES program offers the highest customer incentive of any HPwES program nationally. This

customer incentive has two components:

• Customer incentives up to a maximum of $5,000, based on a projection of total site energy

savings; and

• 0% financing for 10 years up to $10,000, either through an unsecured loan through Energy

Finance Solutions (EFS) or the New Jersey credit union league, or through an on-bill repayment

option through New Jersey Natural Gas or South Jersey Gas.

The program is planning for an average incentive (including customer and contractor incentives and

interest rate buy-downs) of approximately $5,400 per project in FY2015,2 three times the national

average of $1,800.3 In recent years, more than 90% of projects have achieved Tier 3 incentives,

qualifying them for a $5,000 incentive. In addition, 80% of NJ HPwES customers take the zero interest

rate loan. The cost to the program to buy down interest rates from a starting rate of 10-13% to 0% for a

2 NJ HPwES Sponsor Profile for CY2013.

3 Jacobsohn, Ely, Courtney Moriarta, and Gannate Khowailed. “Overview of Home Performance with ENERGY STAR

Results,” presented at 2014 Affordable Comfort conference, www.energystar.gov/ia/home_improvement/downloads/HPwES_Results_ACI2014_for_ACI.pdf.

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10 year, $10,000 loan is approximately $4,500 per loan. This incentive structure has been in place since

April 2010, when the Program reduced the maximum per project incentive from $10,000 to $5,000.

In order to evaluate whether such high incentives are justified, it is useful to compare the performance

of the NJ HPwES program to HPwES programs in other states. By many measures, the NJ HPwES

Program is performing very well:

• Participation. According to DOE data, the NJ program is completing more HPwES projects

annually than all but three states; only Massachusetts, New York, and Connecticut complete

more projects and Connecticut uses a very different delivery model that results in much less

comprehensive projects. 4

• Comprehensiveness. Because of its program design that successfully engages HVAC contractors,

HPwES projects completed in New Jersey are significantly more comprehensive than those

completed in most other states. The program reported average total site energy savings of 37

MMBtus per project in 2013, compared to a national average of 23 MMBtus per project.

Because they often include major HVAC upgrades in addition to shell measures, NJ HPwES

projects are also significantly more expensive than the national average. NJ projects have an

average invoice cost (before rebates) of $15,000 compared to a national average of $7,500.5

• Contractor engagement and market transformation. NJ has succeeded in transforming a cadre

of high-quality HVAC contractors into whole-house energy providers. In 2013, NJ had the fourth

highest number of Century Club awardees, DOE’s designation for contractors completing more

than 100 HPwES projects per year.

• Financing. The NJ HPwES has developed financing options that are popular with customers,

including an on-bill repayment option through one of the natural gas utilities that has succeeded

in broadening access to financing to a wider range of households through the use of utility bill

credit history as alternative underwriting criteria.

• Accuracy. According to an analysis by the New Jersey Institute of Technology (NJIT) that

compared modeled energy savings to post-project utility bill data, projections of energy savings

in the HPwES program appear to be reasonably accurate.6

However, evidence from HPwES programs in other states indicates that there is likely room to reduce

the program costs associated with incentives and financing while maintaining or even improving results.

Appendix B compares leading HPwES programs in terms of reported projects, market penetration,

incentive levels, and financing options. Several states are achieving similar or better results with lower

incentives and less subsidized financing:

• Massachusetts and New York have more completions per year, and Massachusetts, Connecticut,

and Vermont have higher market penetration despite lower rebates;

• Arizona, Maryland, and New York have similar market penetration with lower rebates and

higher interest rates; and

• Interest rates vary significantly between leading states, and evidence is mixed about whether

zero interest rates are critical for generating customer demand for HPwES programs.

4 DOE 2013 HPwES Project Completion by State and Sponsor,

www.energystar.gov/ia/home_improvement/downloads/HPwES_Data_by_State_&_Sponsor_13_Q4.pdf 5 Jacobsohn, Ely, Courtney Moriarta, and Gannate Khowailed. “Overview of Home Performance with ENERGY STAR

Results,” presented at 2014 Affordable Comfort conference, www.energystar.gov/ia/home_improvement/downloads/HPwES_Results_ACI2014_for_ACI.pdf. 6 Liaukus, Christine, NJIT. Presentation to NJ Energy Efficiency Committee, September 9, 2014.

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NJ HPwES incentives are tiered according to the savings achieved. For FY2016, we are proposing

adjustments to the incentive levels and financing to reduce program costs and enable more flexible

financing options. Current and proposed incentive levels and financing options are described in Section

9, below.

5.25.25.25.2 Program requirementsProgram requirementsProgram requirementsProgram requirements

The NJ HPwES program follows the standard set of requirements that apply to whole-house retrofit

programs nationally. Program requirements include:

• Meeting national DOE requirements for HPwES program sponsors (DOE is in the process of

rolling out an update to these requirements, known as version 1.5, to take effect in March

2015);

• Requiring Building Performance Institute certification for participating contractors and Gold Star

certification for participating businesses;

• Requiring that installations meet BPI standards and energy code requirements;

• Meeting state licensing and permitting requirements;

• Ensuring that necessary health and safety issues are addressed; and

• Performing on-site quality assurance on a percentage of projects.

No changes to these program requirements are proposed.

5.35.35.35.3 Identify best practicesIdentify best practicesIdentify best practicesIdentify best practices

Figure 5 highlights several notable differences between the NJ HPwES program design compared to

other HPwES programs nationally.

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Figure 5. Differences Between NJ HPwES Program and Other Leading Programs

New Jersey Other Programs

Contractor base is primarily

HVAC contractors.

Contractor base is primarily insulation and home improvement

contractors.

HPwES program is completely

market-based, with contractors

leading marketing and

customer engagement.

Programs vary widely. Some are market-based like New Jersey, but in

other states the program administrator or utility takes a much more

active role in marketing, lead generation, and customer engagement.

Energy audits and direct

installations are not a focus.

Many other states offer free or low-cost energy assessments as a core

program offering, usually bundled with direct installation of low-cost

measures such as lighting and water conservation devices. In some

states, like CT, MA, and MD, the program or utility provides free

assessments and/or direct installation services and takes

responsibility for scheduling the audits and setting prices for

subcontractors. Several states, including CT and VT, are moving

towards a hybrid approach in which customers can get a free or low-

cost assessment with direct installation measures through the utility

or program, and can also access a market-based HPwES program if

they are interested in deeper energy savings.

Incentives are based on total

site energy savings.

Two common approaches are to set incentives as a percentage of

total job cost, or to offer a rebate for individual measures. Incentives

based on total site energy savings are rare.

In general, the NJ HPwES program is well-aligned with best practices and we do not propose major

changes to the program design. As discussed previously, the program is performing quite well in terms

of participation, comprehensiveness, and market transformation, due in large part to its successful

engagement of HVAC contractors. Further, NJ’s performance-based incentive design based on total site

energy savings is considered the gold standard for HPwES programs and is strongly supported by

contractors, including the national trade association Efficiency First.7 Incentives structured as a

percentage of total job cost are problematic in that they tend to limit project size, resulting in less

comprehensive installations, and do not incentivize higher energy savings.

Within the HPwES program model, there are several areas where there is room for improvement in New

Jersey, compared to how leading programs are performing. These areas include:

• Cost-effectiveness. NJ’s incentive and financing structure is significantly more expensive than

other leading states, as discussed in Section 5.1.

7 Efficiency First proposed that Maryland change its incentive structure from 50% of cost to a design based on total energy

savings (comments submitted to MD Home Performance Work Group, January 7, 2015).

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• Recognizing energy efficiency’s contribution to home values. Leading programs provide

completion certificates that document the improvements made and offer home energy scores,

such as the DOE Home Energy Score, to enable comparisons to other homes.

• Marketing. With the exception of cooperative marketing through contractors, NJ’s marketing

approach is extremely modest compared to other leading programs. There are opportunities to

offer much more robust marketing of the NJCEP and engage new partners in customer

engagement, such as community organizations and the real estate sector.

Looking more broadly at the suite of NJCEP residential program offerings, the fully market-based, HVAC-

focused approach used in the NJ HPwES program has pros and cons. A key benefit of this approach is

that it leads to true market transformation and empowers HVAC contractors to run successful energy

efficiency businesses. Key shortcomings of this approach are:

• Entry pathway into NJCEP. There is no standard, easy way for a customer to enter the NJCEP.

This makes it difficult to market the program, generate leads, and engage a broad range of

customers. Many leading programs offer a free or low-cost assessment to make it easy for

customers to understand the energy efficiency opportunities in their home and connect with

program offerings, while also capturing savings from direct installation. For example,

Connecticut’s Home Energy Solutions program is directly managed by the utilities, which offer a

$99 installation service that includes direct installation of air sealing, along with lighting and

water conservation measures.8 Under a centrally managed program, it can also be easier to

market the program because the call to action is simpler – for example, “call MassSAVE” –

rather than referring customers to a long list of contractors.9

• Engaging the broader home improvement market. The HPwES program model only engages a

small percentage of the market for remodeling projects and building envelope improvements.

Tier 2 was designed as an entry pathway for building envelope measures, but the program has

had low participation in this tier to date.

Program modifications specific to the HPwES program are discussed in Section 9, while

recommendations for new programs within the NJCEP residential portfolio are discussed in Section 10.

6.6.6.6. SSSSUMMARY OF INPUT FROMUMMARY OF INPUT FROMUMMARY OF INPUT FROMUMMARY OF INPUT FROM CONTRACTORS AND CUSTCONTRACTORS AND CUSTCONTRACTORS AND CUSTCONTRACTORS AND CUSTOMERSOMERSOMERSOMERS

The Market Manager team periodically solicits feedback from customers who have participated in the

HPwES program, as well as participating contractors. Findings from a recent customer survey include:

• Most customers heard about the program through their contractor, rather than through NJCEP

program marketing;

• Most customers are highly satisfied with the program and would recommend it to others;

• Most customers were happy with all the program benefits, particularly the generous rebates;

and

• Customers identified money/upfront cost as by far the greatest obstacle to improving the

energy efficiency of their home.

The team also participated in two Homes subcommittee calls in December 2014 that solicited feedback

from participating contractors, utilities, and other program partners and stakeholders. Figure 6

8 http://www.cl-p.com/Home/SaveEnergy/Rebates/HomeEnergySolutions.aspx.

9 http://www.masssave.com/.

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summarizes key feedback related to the HPwES program. Feedback was provided by individuals and is

not intended to indicate that the group reached consensus.

Figure 6. Current and Proposed HPwES Incentives and Financing Options

Topic Feedback

Incentives • It’s important to set HPwES incentives at a level that encourages customers to

jump up from the WarmAdvantage and CoolAdvantage programs.

• While current incentive levels are popular with customers and contractors, it’s

clear they aren’t financially sustainable.

• Ensure that any changes to incentive levels are made gradually and phased in over

a period of years.

Financing • It would be nice to have more flexibility to allow for loan amounts greater than

$10,000. Some large projects can cost more than that.

• The 0% loan is more important than the rebates in driving participation. 0% is key.

• The program should consider requiring customers to choose between taking

rebates or taking the 0% loan, rather than getting both at once.

• A number of customers are turned down for program financing and are not able to

proceed with work.

• The on-bill repayment program offered by New Jersey Natural Gas and the South

Jersey Gas loan allow for more flexible underwriting based on utility credit history,

which has increased participation by middle-income household. The average

household income is around $60,000 for the New Jersey Natural Gas program.

New

Measures

• Consider reinstating a direct installation (DI) program to capture savings from

lighting and appliances. DI could happen during audits or jobs.

• There are challenges to incorporating these measures into modeled energy

savings, since incentives are based on savings.

• Installation of appliances, and to a lesser extent lighting, is a distraction for

contractors that are focused on major measures that are much more important.

• Many contractors are not interested in dealing with installation and maintenance

of appliances.

• There are pros and cons and more consideration is needed.

• Customers are interested in smart homes and devices. Consider including smart

thermostats in the program.

Remodeling

Opportunities

• The HPwES program is not designed to capture remodeling opportunities. For

example, siding contractors should install an intact air barrier on residing jobs. The

incremental cost for this measure is $500-1000 with combustion testing included,

about a 5-7 year payback.

• Energy efficiency should also be included in other types of remodeling projects,

such as roof replacement and basement remodels.

• Energy code already applies to remodeling projects.

• There are several barriers to doing HPwES at the same time as remodeling.

Projects can get very expensive and customers can’t always afford to do all the

work at once. Also, remodels can take many months, which is makes it difficult to

close jobs.

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Topic Feedback

Marketing • HPwES should be marketed to new homeowners or in conjunction with a home

inspection.

• Many HPwES contractors participate in the coop marketing program, but logo

guidelines make it difficult for contractors to use coop marketing for web, radio,

and television advertising.

• HPwES should be marketed to WarmAdvantage and CoolAdvantage customers.

Program

Administration

• An online project tracking system would be helpful.

• Communication with program administrators is generally very good.

• There may be opportunities to streamline paperwork and reduce the time required

to process incentives.

• The program should seek to improve its level of knowledge by using pilots with

control groups to test interventions at a small scale before rolling them out

statewide. Customer and contractor surveys are also helpful.

7.7.7.7. CCCCODES AND ODES AND ODES AND ODES AND SSSSTANDARDS TANDARDS TANDARDS TANDARDS IIIIMPACTS ON MPACTS ON MPACTS ON MPACTS ON PPPPROGRAMROGRAMROGRAMROGRAM

HPwES program savings are based on software that models the savings from the existing condition of

the home to the improved condition of the home. Therefore, the program is not directly impacted by

changes to standards and baselines. The HPwES program does need to ensure than installations comply

with state code and energy code requirements, for example by requiring minimum insulation R-values in

certain areas of the house.

8.8.8.8. CCCCHANGINGHANGINGHANGINGHANGING BBBBASELINES ASELINES ASELINES ASELINES IIIIMPACTS ON MPACTS ON MPACTS ON MPACTS ON PPPPROGRAMROGRAMROGRAMROGRAM

HPwES program savings are based on software that models the savings from the existing condition of

the home to the improved condition of the home. Therefore, the program is not directly impacted by

changes to standards and baselines.

9.9.9.9. SSSSUMMARY OF UMMARY OF UMMARY OF UMMARY OF RRRRECOMMENDED ECOMMENDED ECOMMENDED ECOMMENDED PPPPROGRAM ROGRAM ROGRAM ROGRAM MMMMODIFICATIONSODIFICATIONSODIFICATIONSODIFICATIONS

This section recommends modifications to the NJ HPwES program for FY2016. Recommendations in this

section are designed to result in incremental improvements to the current program model and meet the

following objectives:

• Increase program savings on a per-project basis;

• Increase HPwES energy savings by 30%; and

• Reduce overall program spending by 20-30% compared to FY2015.

•

9.19.19.19.1 Recommendations to Recommendations to Recommendations to Recommendations to Increase Increase Increase Increase Savings Savings Savings Savings and Participationand Participationand Participationand Participation

Expand Insulation and Duct Sealing to Increase Per Project Savings

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The Market Manager has identified several opportunities to increase HPwES program savings. The

program currently requires air sealing of attics and attached garages for all projects, but does not

require attic insulation. As shown in Appendix A, attic insulation is currently included in more than 70%

of projects, but there continue to be missed opportunities. We recommend that projects with less than

6 inches of existing insulation (R-19 or less) be required to install insulation up to R-38 in order to qualify

for HPwES incentives.

The Market Manager also believes that the program can obtain more savings by strengthening its focus

on duct sealing using the pressure pan test, which is less cumbersome than the previously required Duct

Blaster test. We estimate that increased installation of attic insulation and duct sealing would result in a

4-5% increase in energy savings per project.

Add Smart Thermostats and Lighting to Eligible Measure List

“Smart” or communicating thermostats, have entered the residential market and are capable of saving

more energy and peak power than the previous generation of programmable thermostats. According a

recent ACEEE paper, “recent pilots for communicating thermostats, occupancy-responsive thermostats,

and adaptive control schemes have shown significant annual HVAC savings on the order of 10-20%.”10

Energy savings come from more accurately operating the HVAC system according to people’s actual

schedules, as well as greater use of setbacks because of easier programming and less chance of

discomfort. In addition, some thermostats have special settings for heat pumps that can prevent the

backup resistance heat from engaging by increasing the length of time used to warm the space.

We recommend that smart thermostats be added to the list of incentive-eligible measures in the HPwES

program. Smart thermostats are not appropriate for every home or application, so the program should

offer contractor training on best practices for smart thermostat installation. The energy modeling

software used to calculate savings may need to be updated to account for smart thermostat savings.

Lighting accounts for a significant opportunity for savings in Home Performance projects. Allowing

contractors to install CFL & LED lighting upgrades as eligible measures would provide additional savings

to the program.

Speed Incentive Payments to Enable Small Contractors to Complete More Projects

Generally, HPwES contractors deduct the incentive amount from the project cost, providing customers

with the benefit of an instant rebate. These rebates are then assigned to contractors and approved for

payments once completed projects are submitted to the program. Once projects have been approved, it

takes an additional 45 to 60 days for contractors to receive their payments. In some instances,

contractors are limiting the number of projects they complete within the program to avoid cash flow

issues. We believe that faster incentive payments will encourage smaller companies to complete and

submit more HPwES projects. Currently, about 40 contractors complete more than 20 projects per year.

This number could be increased to 50 if payments were received faster, resulting in about 100 additional

projects per year.

10 Woolley, Jonathan, Marco Pritoni, Mark Modera, and Therese Peffer, “Why Occupancy-Responsive Adaptive Thermostats Do

Not Always Save - and the Limits for When They Should,” ACEEE Summer Study on Energy Efficiency in Buildings, 2014.

http://www.aceee.org/files/proceedings/2014/data/papers/3-490.pdf.

14

9.29.29.29.2 Recommendations to Reduce Recommendations to Reduce Recommendations to Reduce Recommendations to Reduce Program Program Program Program CostsCostsCostsCosts

Reduce Customer Incentives

As shown below in Figure 7, we recommend maintaining the current incentive structure, in which

incentives are based on the percentage of total site energy savings. The Market Manager proposes a

maximum customer incentive of $4,000 for a project with total energy savings greater than 25%.

It is important to maintain HPwES incentives at a level higher than WARMAdvantage and

COOLAdvantage, in order to enable contractors to upsell customers into HPwES. Assuming that HVAC

rebates are maintained at current levels, a customer installing a combination gas furnace and water

heater, plus a central air conditioner, would qualify for a rebate of $1,500 from the NJCEP and a $500

rebate from the New Jersey Natural Gas or South Jersey Gas, for a total of $2,000. The maximum HPwES

incentive of $4,000 is double that level, and combined with the low-interest loan, will continue to

provide a powerful inducement for many customers to jump to HPwES and undertake more

comprehensive projects.

Figure 7. Current and Proposed Customer Rebates

Total Energy

Savings Current Rebate Proposed FY2016 Rebate

Tier 2 10% 50% of cost up to $2,000 50% of cost up to $2,000

Tier 3 Level 1 20% 50% of cost up to $4,000 50% of cost up to $3,000

Tier 3 Level 2 25% 50% of cost up to $5,000 50% of cost up to $4,000

Reduce Program Costs Associated with Financing

The zero interest, 10-year loan offered by the HPwES is extremely popular among customers and

contractors alike, with more than 80% of customers taking program financing. As noted above in Section

5.1, the cost to the program to buy down interest rates from a starting rate of 10-13% to 0% for a 10

year, $10,000 loan is approximately $4,500 per loan. Contractors have also suggested that more

flexibility in loan amounts and terms would be helpful. For example, currently loans are capped at

$10,000, but some customers would like to finance a larger amount. Additionally, not all customers

require 10-year loan terms. Under the current program, the full buy-down amount is paid up front, so

the program has still paid $4,500 even if the customer chooses to pay off the loan early.

We believe that there is potential to reduce the cost to the program associated with the interest rate

buy-down by approximately 20%, even while enabling larger loans up to $15,000, by:

• Raising the interest rate paid by the customer, for example to 1.99% or 2.99%;

• Offering shorter loan terms;

• Linking interest rates to income levels, so that low and middle-income borrowers pay a lower

rate; or

• A combination of the above strategies.

Figure 8 illustrates how changes to interest rates and loan terms affect the cost to the program per loan.

Figure 8. Cost to the Program of Interest Rate Buy-Down for $10,000 Loan

15

Buy-Down from

11% to 0%

Buy-Down from

11% to 1.99%

Buy-Down from

11% to 2.99%

3 Year Term $1,591 $1,315 $1,173

5 Year Term $2,523 $2,095 $1,874

10 Year Term $4,520 $3,786 $3,402

Figure 9 provides two financing scenarios for FY2016 that would reduce the program costs associated

with financing by approximately 20%. We recommend gathering feedback from HPwES contractors and

stakeholders to determine the preferred option.

Figure 9. Current and Proposed Financing Options

Total

Energy

Savings Current Financing

Proposed Financing –

Option 1

Proposed Financing –

Option 2

Tier 2 10% 0% up to $5,000,

5 year loan

0% up to $5,000,

5 year loan

0% up to $5,000,

5 year loan

Tier 3 Level 1 20% 0% up to $10,000,

10 year loan

0% up to $15,000,

5 year loan OR

2.99% up to $15,000,

10 year loan

1.99% up to $15,000,

10 year loan

Tier 3 Level 2 25% 0% up to $10,000,

10 year loan

0% up to $15,000,

5 year loan OR

2.99% up to $15,000,

10 year loan

1.99% up to $15,000,

10 year loan

In addition to the above changes, we recommend exploring other financing mechanisms such as loan

loss reserves and revolving loan funds to reduce program cost while expanding access to financing to

additional borrowers. These mechanisms are discussed further in Section 10.

16

Reduce Contractor Incentives

The HPwES program currently offers a contractor incentive tied to their performance. Contractors

receive a $700 incentive if their completed project passes field inspection the first time the project is

inspected. They are not eligible to receive this incentive if the project fails the field inspection. To

maintain the quality of work done by contractors, the program should continue to offer this incentive,

but we recommend reducing it to $500 to reduce program costs.

Remodeling Pilot Program

New Jersey’s HPwES program may be missing opportunities to engage the broader market for

remodeling projects and building envelope improvements. If remodeling in New Jersey is occurring at

the same rate as nationally, there are likely 20,000 to 30,000 insulation and residing projects per year.11

We recommend outreach to the insulation and remodeling industry to understand the barriers and

motivations to participation in the NJCEP, and opportunities to engage these contractors and customers

through a new program or a modification of the HPwES program.

NJIT has identified low-cost opportunities to incorporate energy efficiency into remodeling projects. For

example, the Re-Side Tight approach developed by NJIT focuses on harnessing the opportunity to

improve a home’s energy performance while it’s being resided by detailing a water-resistant barrier that

also acts as an intact air barrier. This measure is estimated to reduce air infiltration by 38% at an

incremental cost of $500-$1,000, resulting in annual savings of $250 and lifetime savings of $5,000 or

more.12

While the Market Manager finds this opportunity interesting there are a number of obstacles that need

to be fully understood to create a practical, repeatable program that delivers energy savings in the

marketplace. These include:

• Developing a contractor base and implementation method

• Determining savings methods and calculations (deemed versus calculated)

• Determining an appropriate incentive type and amount (prescriptive versus site)

In order to understand these dynamics, the Market Manager proposes a pilot program in FY2016 to

gather data and inform the BPU about best practices and program design issues.

If that isn’t possible, an alternative option is to consider creating a prescriptive rebate program for

building envelope measures outside the HPwES program. Under this approach, savings would be

deemed, rather than modeled. As ERS noted in its benchmarking study of the NJCEP program portfolio,

the majority of Existing Homes programs nationally offer measure-based rebates.13 Leading states

offering measure-based rebates include Maryland, Michigan, Oregon, and Vermont. If thoughtfully

structured, the measure-based rebates could serve as the entry-level option in New Jersey, just as they

do for HVAC measures, while the HPwES program would continue to serve customers and contractors

who are willing to invest in a whole-house approach.

11 US Census, Home Improvement Characteristics – Owner-Occupied Units, 2013 American Housing Survey.

12 Liaukus, Christine, NJIT. Presentation to NJ Energy Efficiency Committee, September 9, 2014.

13 ERS, NJCEP Benchmarking Study: Initial Findings and Discussion.

17

10.10.10.10. SSSSUMMARY OF UMMARY OF UMMARY OF UMMARY OF RRRRECOMMENDED ECOMMENDED ECOMMENDED ECOMMENDED NNNNEW EW EW EW PPPPROGRAMSROGRAMSROGRAMSROGRAMS

In addition to the program changes proposed for FY2016, we have identified several new offerings that

may be worthy of further investigation. These programs and initiatives represent a bigger change from

current program delivery, and deeper engagement with contractors, stakeholders, and program

partners would be required to hone the ideas and develop program designs. Some of these initiatives

could potentially be implemented within the HPwES program model, while others might be additions to

the NJCEP residential outside of HPwES. These initiatives are not ready for implementation in FY2016,

but we recommend that a process be established to conduct additional research, discuss them with

program partners, gather contractor and stakeholder input, and – if the ideas have merit – develop a

plan to move them forward.

10.110.110.110.1 Explore Credit Enhancements to ReduExplore Credit Enhancements to ReduExplore Credit Enhancements to ReduExplore Credit Enhancements to Reduce Financing Costs and Expand Accessce Financing Costs and Expand Accessce Financing Costs and Expand Accessce Financing Costs and Expand Access

We recommend exploring the use of loan loss reserve fund or a revolving loan fund to reduce program

costs while expanding access to financing. We have had initial conversations with the program’s current

financial partners, EFS and the NJ Credit Union League, and both are interested in further discussion.

Under a loan loss reserve, the program would set aside a fund to provide coverage for financial

institutions against potential losses. The result is that the program would continue to leverage private

capital, but the starting interest rate (before the buy-down) could likely be reduced from the 10-13%

range to 5-7% or even less, significantly reducing the program cost associated with each loan. Moreover,

if the number of defaults is low – as is likely based on the experience of other energy efficiency

programs nationally – the loan loss reserve fund would carry through to future years. In this way, the

loan loss reserve set-aside would be a one-time cost, not an annual cost to the program.

Loan loss reserves can also be used to expand access to financing, allowing more customers to qualify

for loans, by allowing a financial institution to modify its underwriting criteria and accept more risk than

it would otherwise. While the majority of customers are approved for loans under the current program,

more than 10% of HPwES program applicants are turned down, and contractors have noted that more

customers would be able to undertake comprehensive projects if they could qualify. These and other

benefits of loan loss reserves are described in more detail in Appendix C.

Another option is a revolving loan fund, in which the program funds currently being used for interest

rate buy-downs could be converted to debt capital. Under this approach, rather than spending the

money each year, the principal would be returned to the program each year as loans are repaid. The

program would need to determine a fair return on capital but would have more control over the loan

rates, terms, and underwriting criteria. These strategies could potentially be combined, for example by

using a loan loss reserve to reduce interest rates for credit-worthy customers, while using a revolving

loan fund to serve non-qualifying customers.

10.210.210.210.2 Engage the Real Estate IndEngage the Real Estate IndEngage the Real Estate IndEngage the Real Estate Industryustryustryustry and and and and Consider Consider Consider Consider OfferOfferOfferOfferinginginging a Certificatea Certificatea Certificatea Certificate

Studies by the National Association of Home Builders and National Association of Realtors show that

prospective home buyers are looking for homes with green and energy-efficient features – and are

18

willing to pay more for them.14 DOE recommends that HPwES programs offer homeowners a certificate

of completion, noting that “certificates can provide the homeowner proof that energy improvements

have been made to the home – which can prove valuable in future financing or sales transactions.”15

We recommend that the HPwES program explore the possibility of offering a completion certificate. The

certificate should comply with BPI standards and include the HPwES and NJCEP logos, the name of the

contractor who completed the improvements, and information on the specific improvement measures

installed. The program should also consider whether to implement the DOE Home Energy Score, which

ranks a home’s energy performance on a 1-10 scale.16 If a home that has completed HPwES

improvements is later sold, both the certificate and the Home Energy Score would help potential

homebuyers identify that the home is energy efficient and see how it compares to other homes. In New

Jersey, New Jersey Natural Gas is already implementing the DOE Home Energy Score as a component of

the energy audits offered through the SAVEGREEN project.17

The program should also consider ways to work with the real estate industry to include energy efficiency

information in the Multiple Listing Service (MLS) where most homes are listed for sale, and ensure that

real estate agents and appraisers are trained to support buyers and sellers of energy-efficient homes.

10.310.310.310.3 Consider Expansion ofConsider Expansion ofConsider Expansion ofConsider Expansion of Subsidized Subsidized Subsidized Subsidized Energy Assessments with Direct InstallationEnergy Assessments with Direct InstallationEnergy Assessments with Direct InstallationEnergy Assessments with Direct Installation

The NJCEP offers a free energy assessment and direct installation of measures through it’s Comfort

Partners Program. The program offers:

• Free installation of cost-effective energy efficiency measures, including: efficient lighting

products; hot water conservation measures (water heater insulation, water heater pipe

insulation and energy-saving showerheads and aerators); replacement of inefficient

refrigerators; thermostats; insulation upgrades (attic, wall, etc.); and blower-door guided air

sealing; duct sealing and repair; heating/cooling equipment maintenance and other sealing; duct

sealing and repair; heating/cooling equipment maintenance and other measures; and

• Customized energy education to help develop an action plan for energy efficiency in the home.18

This offering is similar to energy assessments that are offered to all customers, regardless of income, in

several other states. As noted above, Connecticut’s Home Energy Solutions program is directly managed

by the utilities, which offer a $99 installation service that includes direct installation of air sealing, along

with lighting and water conservation measures.19 Maryland’s Quick Home Energy Checkup offers a free

assessment with direct installation of lighting, water conservation devices, and advanced power strips,

and Vermont is in the process of developing a similar program.

We recommend exploring the possibility of expanding the offerings in Home Performance to include a

program sponsored energy assessment . The benefit of this approach is that it would create a clear entry

pathway into the entire portfolio of NJCEP residential program offerings, generating referrals for HPwES,

14 National Association of Home Builders, “NAHB Study Reveals What Home Buyers Really Want,” February 19, 2013.

http://www.nahb.org/news_details.aspx?newsID=15794; National Association of Realtors, “2014 Profile of Home Buyers and

Sellers.” http://www.realtor.org/reports/highlights-from-the-2014-profile-of-home-buyers-and-sellers/. 15

DOE, Home Performance with ENERGY STAR Sponsor Guide and Reference Manual (Version 1.5), March 2014. 16

www.energy.gov/eere/buildings/home-energy-score. 17

www.savegreenproject.com. 18

www.njcleanenergy.com/residential/programs/comfort-partners/comfort-partners. 19

www.cl-p.com/Home/SaveEnergy/Rebates/HomeEnergySolutions.aspx.

19

HVAC, and Efficient Products. It would also create a clear call to action that would make it easier to

market the Clean Energy Program:

The challenge of this approach is designing the program structure such that the low-cost assessment

truly drives leads for the other programs, rather than making most customers feel like they are “done”

with energy efficiency. Several states have wrestled to find this balance and structure the programs in a

way that encourages customers to go deeper. This may be less of an issue in New Jersey, because the

HPwES program is so HVAC-driven and therefore would continue to take advantage of opportunities to

upsell customers when they are making needed equipment upgrades. Nonetheless, careful program

design is needed to ensure that a free assessment and direct installation program in New Jersey would

increase participation in, rather than compete with, the other NJCEP residential programs.

20

AAAAPPENDIX PPENDIX PPENDIX PPENDIX A.A.A.A. FY2014FY2014FY2014FY2014 HPHPHPHPWWWWESESESES PPPPROGRAM ROGRAM ROGRAM ROGRAM MMMMEASURE EASURE EASURE EASURE DDDDATAATAATAATA

21

22

23

AAAAPPENDIX PPENDIX PPENDIX PPENDIX BBBB.... CCCCOMPARISON OF OMPARISON OF OMPARISON OF OMPARISON OF LLLLEADING EADING EADING EADING HPHPHPHPWWWWESESESES PPPPROGRAMSROGRAMSROGRAMSROGRAMS

# 2013

HPwES

Projects

Market

Penetration

Energy

Audit

Price HPwES Incentive

Additional

Rebates

for HVAC

Assisted

HPwES

(Higher

Incentives

Based on

Income)

Interest

Rate Lender

Loan Term

(Years)

Max

Amount

MA 25,382 1.85% Free

75% of insulation cost

up to $2,000 plus free

air sealing

Yes No 0% 68 CUs Up to 7 $25,000

CT 11,520 1.41% $99

co-pay

$99 co-pay for DI

measures including air

sealing

Yes Yes

Varies;

0% for

HVAC

AFC First,

OBR Up to 10 $15,000

VT 1,187 0.61% $100

discount

Measure-based up to

$2000 No No Varies

Local

lenders Varies Varies

NJ 4,805 0.27% Market

pricing

Based on Total Energy

Savings up to $5,000 No No 0%

EFS, CUs,

OBR

Varies;

usually 10 $10,000

NY 8,355 0.26% Free 10% of cost up to

$3,000 No Yes 3.49% EFS, OBR 5,10,15 $25,000

AZ 2,980 0.24% $99

co-pay Measure-based Yes No 7.99%

Nat'l

Bank of

AZ

Not listed Not listed

MD 2,542 0.23% $100

co-pay

50% of cost up to

$2,000 Yes No 9.99%

Mariner

Finance Up to 10 $20,000

WI 2,560 0.17% Market

pricing

33% of cost up to

$1,250 No Yes

10.99-

19.99% EFS Up to 10 $20,000

24

# 2013

HPwES

Projects

Market

Penetration

Energy

Audit

Price HPwES Incentive

Additional

Rebates

for HVAC

Assisted

HPwES

(Higher

Incentives

Based on

Income)

Interest

Rate Lender

Loan Term

(Years)

Max

Amount

OR 1,309 0.14% Market

pricing Measure-based Yes No Varies

Local

lenders Varies Varies

MI 1,956 0.07%

Market

pricing;

discounts

available

Measure-based Yes No NA NA NA NA

Notes:

• Market penetration calculated by dividing the number of single-family detached homes by the number of 2013 HPwES projects.

Data Sources:

• DOE 2013 HPwES Project Completion by State and Sponsor

• US Census, Historical Census of Housing Tables, www.census.gov/hhes/www/housing/census/historic/units.html

• MA: www.masssave.com

• CT: www.energizect.com/residents/solutions/energy-assessments

• VT: www.efficiencyvermont.com

• NJ: www.njcleanenergy.com/residential/programs/home-performance-energy-star/home-performance-energy-star-r

• NY: www.nyserda.ny.gov/All-Programs/Programs/Home-Performance-With-ENERGY-STAR

• AZ: azhomeperformance.com/financing_rebates2.html

• MD: www.bgesmartenergy.com/residential/home-performance-energy-star

• WI: www.focusonenergy.com/residential/efficient-homes/home-performance-energy-star

• OR: energytrust.org/residential/incentives/info/financing.aspx

• MI: www.consumersenergy.com/eeprograms/HPHome.aspx?id=4129

25

AAAAPPENDIX PPENDIX PPENDIX PPENDIX CCCC.... LLLLOAN OAN OAN OAN LLLLOSS OSS OSS OSS RRRRESERVE ESERVE ESERVE ESERVE OOOOVERVIEWVERVIEWVERVIEWVERVIEW

1.1.1.1. WWWWHAT IS A HAT IS A HAT IS A HAT IS A LLLLOAN OAN OAN OAN LLLLOSS OSS OSS OSS RRRRESERVEESERVEESERVEESERVE????

Loan loss reserves (LLR) for Energy Efficiency (EE) are the most commonly used credit enhancement,

frequently deployed to reduce borrowing costs or extend borrowing terms for borrowers that would

likely qualify for other, often more expensive, loan products. Under a LLR, funds—typically public or

utility—are set aside (“reserved”) as loans are issued (e.g., 10% of the total portfolio of loans). In this

way, a $1 million, 10% LLR provides coverage for a total loan portfolio of $10 million. The LLR may be

specific to a portion of the loss on individual loans. For instance, compensation for losses is limited to

10% of any individual loan, ensuring a natural incentive for lenders to continue to apply appropriate

underwriting and collection criteria to all loans.

2.2.2.2. BBBBENEFITS OF ENEFITS OF ENEFITS OF ENEFITS OF LLRLLRLLRLLRSSSS

Advantages of loan loss reserve funds include:

• A third-party can administer the LLR and handles the escrow and accounts for all loans.

Typically, LLRs are administered by a bank, credit union, CDFI, housing finance agency or an

energy-efficiency nonprofit.

• Programs can utilize the LLR to stimulate market transformation through development of an

energy efficiency financial asset class and eventually function without publicly sourced credit

enhancements, by proving to lenders that home energy loans can be profitable.

• Providing for an energy upgrade lending mechanism has been shown to directly support utility

and program sponsor DSM goals by supporting a higher number of projects of a higher dollar

value than in programs without energy lending programs.

• Public funds serve to mobilize, leverage, and support the financial investor (FI) partner so it will

offer, or pioneer and gain experience with new EE financing products.

• Broadening access to finance for more borrowers (e.g., homeowners) by allowing the FI partner

to modify its underwriting criteria and accept more risk than it would otherwise. Grantees

should note that the “risk” might, in fact, be “perceived risk” as opposed to actual and

demonstrated risk, due to the FI’s lack of experience with EE lending.

• Lengthening loan tenors (i.e., the timeframe of the loan might be extended from 3 years to 7 or

10 years).

• Reducing loan interest rates, reflecting the lower risk associated with the LLR coverage.

The LLR supports a clean energy loan program initiated between a government-sponsored agency and a

financial institution partner (or partners). Other program partners or stakeholders, such as utilities,

contractors/vendors, or nonprofit EE organizations may also be involved in the grantee’s EE/RE program

to help coordinate and/or run it—conducting program marketing, installing projects, doing

measurement and verification, and more.

26

3.3.3.3. HHHHOW OW OW OW DDDDOES A OES A OES A OES A LLRLLRLLRLLR WWWWORKORKORKORK????

Under an LLR program, funds are placed into an escrow account―either with a separate insUtuUon or

under the administration of the sponsoring agency. As loans are made, escrowed funds are transferred

to a loan loss reserve fund in the amounts specified by the loan loss reserve agreement. Projects are

then completed and loans are repaid over time according to the loan agreement between the financial

partner and the borrower. As loans are repaid, funds flow back into escrow from the loan loss reserve in

order to maintain the predetermined reserve percentage of the active loan portfolio.

One example of a LLR is the fund administered by the Arkansas Energy Office (AEO).20 The Arkansas LLR

is characterized by these elements:

• “Loss-share” ratio. On any single loan loss, a lender may recover only a percentage of the loss

from the LLR, requiring lenders to take a portion of each loss incentivizes financial institutions to

lend responsibly.

• A 10% LLR leverages private capital for energy efficiency upgrades on a 10:1 ratio, thereby

making available for a $400k LLR, $4,000,000 in LLR backed lending capital.

• A 1.5% program processing fee is required to enroll into the LLR program paid by the Program

Participant (financial investor) for each qualified loan payable to the Arkansas Development

Finance Authority (ADFA). This fee covers the costs to AEO for administering the LLR.

• Program Participants have discretionary authority to recover all or a portion of the program

processing fee.

• In the event of a default, Program Participants receive up to 10% LLR compensation for losses.

• Program Participants are required to notify AEO within 60 calendar days after they have

experienced a default by a Residential Program Borrower. They then submit to AEO LLR Claim

Application to receive LLR funds. AEO authorizes ADFA to reimburse the Program Participant

from the Program Participant Loss Reserve Account within 30 calendar days of receipt of the LLR

Claim Application.

• Program Participants are also required to submit monthly loan reports, financial quarterly

reports, and biannual energy savings reports.

4.4.4.4. EEEEXAMPLES OF XAMPLES OF XAMPLES OF XAMPLES OF BBBBESTESTESTEST----PPPPRACTIRACTIRACTIRACTICE CE CE CE EEEENERGY NERGY NERGY NERGY EEEEFFICIENCY FFICIENCY FFICIENCY FFICIENCY PPPPROGRAM ROGRAM ROGRAM ROGRAM LLRLLRLLRLLRSSSS::::

Rather than simply lowering interest rates, some innovative programs are using credit enhancements to

incentivize their financial partners to offer energy improvement loans to households that would

otherwise not have access to capital.

• Indianapolis21 is using a large loan loss reserve—with 50% of losses covered—to households in

its target income demographic (low to moderate income households).

• The cities of Madison22 and Milwaukee23 used part of their DOE Better Buildings grant to

structure a $3 million loan loss reserve to expand access to their loan product. Madison’s and

Milwaukee’s 5% loss reserve reduces potential losses for their financial partner, Summit Credit

20 www.arkansasenergy.org/media/266/AEO%20LLR%20Final%201.2.2014.pdf.

21 energy.gov/eere/better-buildings-neighborhood-program/indianapolis-indiana.

22 energy.gov/eere/better-buildings-neighborhood-program/wisconsin.

23 energy.gov/eere/better-buildings-neighborhood-program/wisconsin.

27

Union, in the event of loan defaults and supports a loan pool of up to $60 million. It has been

structured so that Summit Credit Union can recover more funds from the loan loss reserve on

each loan default for lower-credit-quality consumers.

Michigan Saves24 is a private, nonprofit entity whose mission is to increase the availability of energy

efficiency financing in all market sectors. At its inception, it performed a market assessment to

understand the financial products that banks and credit unions offered. The assessment revealed that

financing options specifically designed for the residential energy efficiency market were not available.

With this knowledge, Michigan Saves decided to create a product with the following attributes:

• Easy to close;

• Contractor-centric;

• No high fees for contractors; and

• Attractive interest rates.

During this process, Michigan Saves contacted the Michigan Credit Union League, which helped identify

13 credit unions that helped Michigan Saves design the financial product and process. A loan loss

reserve was used to allow its financial partners to offer interest rates in the range of 4-6%. Upon design

completion, six of the original thirteen credit unions participated in the program launch. As of early

2015, there are 10 credit unions participating in the program. There are 290 authorized contractors in

the Home Energy Loan Program (HELP).

Since October 2012, Michigan Saves has closed approximately 3,700 loans with a total value of over $35

million. The program approves approximately 80 loans each month. The applicant approval rate is

approximately 60% and the average credit score of applicants is 750 for approved borrowers. The LLR

covers 70% the outstanding loan balance in the event of default (after 90 days) for borrowers with FICO

scores of 640-680. For borrowers with FICO scores above 680, the LLR covers 80% of the loan balance.

Lenders are responsible for the remaining losses above these amounts.

The Loan Loss Reserve pool equals 5% of the loan portfolio for each lender. According to Mary

Templeton, Executive Director of Michigan Saves, the loss reserve has not had an effect on approval

rates because they set up standard underwriting criteria with our lenders. The primary benefit of the

loss reserve is that it allows lenders to offer longer terms and a better rate. Since the inception of the

program, the LLR has caused an increase in the number of participating lenders because they like the

results they see in the marketplace.

24 www.michigansaves.org/program/bbfm.