New CPUC Rulemaking Investigates Green Financing Options

The California Public Utilities Commission (CPUC) has issued a new Order Instituting Rulemaking (R.20-08-022) to examine options for helping residential, commercial, agricultural and industrial utility customer investment in clean energy technology. Financing strategies will become increasingly important as California aims to decarbonize the retail delivery of electricity by the year 2045 under Senate Bill 100. The new rulemaking will “ensure that new options will be accessible to populations that face issues of creditworthiness and barriers to accessing affordable capital.”

The rulemaking will examine the following, and invites parties to suggest additional mechanisms to support customer investments in clean energy:

• Loans
• Green banks, or other state and local financial institutions or structures set up to fund renewable energy and energy efficiency. Green banks have been established in other states (e.g. Connecticut, Montgomery County, Maryland). The California Advanced Energy and Alternative Transportation Financing Authority (CAEATFA), California Pollution Control Financing Authority (CPCFA), and California Lending for Energy and Environmental Needs (CLEEN) Center currently perform some green bank functions.
• Property assessed clean energy (PACE), a mechanism by which financing is attached to the property being improved rather than tied to the person who owns the property. PACE financing is currently available in many local jurisdictions in California, where local governments have authorized special taxes or contractual assessments for improvements.
• On-bill financing (OBF), a mechanism allowing the utility customer to pay for the cost of upgrades. OBF is currently limited to energy efficiency in California, but could be expanded to other technologies and purposes.
• On-bill repayment (OBR), an arrangement in which a third-party lender provides the funds for the improvement (e.g. energy efficiency, distributed generation, storage projects) and the utility collects repayment as a part of the monthly bill. It differs from OBF in that the utility or its ratepayers do not provide the capital, but instead provide only the collection mechanism for the loan.
• Tariff on-bill (TOB) or tariff-based recovery (TBR), an opt-in tariff that allows renters and property owners to have energy efficiency or related improvements made without any out-of-pocket expenses or incurring any debt. This model generally assumes that energy cost reduction is greater than the cost of repayment for the improvements, or uses utility capital investment to finance qualifying projects. These mechanisms may be attractive to lower-income customers who have limited ability to participate in other options.
• Tax equity refers to financing structures where entities that have a tax liability (i.e. private companies) provide equity to energy projects in exchange for ownership interests sufficient to reduce their tax liability. Two examples are the renewable energy production tax credit (PTC) and energy investment tax credit (ITC).
• Loan loss reserves (LLR) are funds set aside to ensure that lenders are not impacted (or are less impacted) by borrower default. This type of credit enhancement gives the lender added assurance that may encourage them to broaden their lending criteria and be more willing to lend funds to lower-income customers or those with less favorable credit scores.
• Interest rate buydown (IRB) is a process where a third party contributes funds to the lending institution for the purpose of making a loan more affordable. An IRB is essentially a subsidy paid at the closing of the loan, enabling a lower interest rate.

The scope of the proceeding is intended to be “very open-ended” and the CPUC seeks comments about how to best target and scope the proceeding to result in maximum benefit to customers in California. "Ultimately, we hope to identify several options that can be scaled to address large parts of both the residential and non-residential customer sectors in California." Opening comments on the rulemaking are due October 5, 2020, reply comments October 19, 2020.

Contact: Lynn Haug or Samantha Neumyer