What is On-Bill Financing/Repayment?
On-bill financing (OBF) and repayment (OBR) are financing options in which a utility or private lender supplies capital to a customer to fund energy efficiency, renewable energy, or other generation projects and is repaid through regular payments on an existing utility bill. The benefits of OBF/OBR include low-to-zero interest rates, simple contract structure, and streamlined repayment. However, OBF and OBR are only available in regions where utilities support on-bill programs.
On-bill financing/repayment may be a good fit if your organization...
- Owns or occupies facilities in regions where on-bill programs are available, and pays its own utility bills
- Wants a simple financing option with convenient repayments
- Is willing to collateralize the loan with the threat of utility disconnection in exchange for lower interest rates
- Seeks financing for specific energy conservation measures in the $5k - $350k size range
To compare on-bill financing/repayment to other financing options that might be a good fit, answer a few questions about your organization.
How it Works
To be eligible for OBF or OBR, a project must be located in the coverage area of a utility that supports on-bill transactions. To learn if they are available in your area, see:
Database of State Incentives for Renewable Energy (locate your state for a list of incentives, which may include on-bill financing)
Contact your local utility to inquire about on-bill programs in your area
In both OBF and OBR structures, the utility collects repayments from the end customer via its monthly utility bill. The distinction lies in the source of capital. OBF programs use public money, ratepayer funds, or utility shareholder funds to pay for projects, and this capital typically comes at interest rates that are very low or even 0 percent. OBR programs use private capital from third-party investors instead. OBR capital typically comes at a higher interest rate than OBF, though it is often cheaper than the market rate for loans due to the added security provided to investors by attaching the repayment obligation to the customer’s utility bill. Somewhat confusingly, the term “on-bill financing” is often used as a shorthand to refer to both types of programs. On-bill programs vary by state and by provider, and each program has its own terms and processes.
In a typical OBF or OBR transaction, the capital to implement the project is provided to the customer by the utility or investor. On-bill programs may require that customers select from a list of pre-approved contractors to perform the installation, and they can sometimes work in tandem with rebate programs to reduce the total cost that must be financed. Once the project is complete, the borrowed funds are repaid each month on the customer’s utility bill for a set term that can range from 2 to 15 years. The energy cost savings from the project are usually large enough to offset the on-bill repayment charge, making the new utility bill equal to or less than the old bill. The customer’s obligation to make repayments is typically collateralized by both the installed equipment and by the possibility that the utility can discontinue service if the customer fails to pay.
On-bill structures vary widely and have differing pros and cons for customers, including balance sheet treatment and transferability. Depending on the on-bill program, the underlying financing can be characterized as a loan or tariff, and less commonly a lease or energy services agreement. In a loan structure, the loan is tied to the customer and cannot be transferred in the event of a property sale. Tariffs, on the other-hand, are tied to the utility meter and may be transferred to a new party if the original owner or renter sells or leaves the building. For more detailed discussion of varying on-bill structures, see ACEEE’s On-Bill Financing Toolkit.
Advantages and Disadvantages
On-bill agreements are typically very simple, and making repayments directly on the utility bill is convenient. A majority of customers see a reduction or no change in their bill.
Low-to-zero interest rates are available in many on-bill programs. Because of the security that on-bill provides to utilities and investors, they can sometimes offer flexible repayment terms ranging from 2 to 15 years.
So long as the customer is billed by the utility or is authorized to be considered an extension of the utility customer, on-bill is a viable option for those in leased space.
There is flexibility for customers who wish to move out of their building, as the repayment obligation can be passed along to future tenants if structured as a tariff.
On-bill programs are only offered by select utilities, and program specifications vary by utility. Therefore, on-bill may be difficult to implement as a portfolio-wide initiative.
On-bill financing programs are not suited for very large projects. Most will not serve projects above $350k.
The consequence of non-repayment is utility disconnection.
State of the Market
On-bill financing for energy projects has existed since the 1970s, but the majority of market activity has occurred since the turn of the century. Most current programs are backed by public or ratepayer funds, but private financiers are increasingly entering the market to expand the size and scope of these programs. OBF and OBR programs work well for the commercial & industrial and non-profit sectors as well as private universities, schools, and hospitals, and they are often viable for multifamily facilities. They are typically not used to finance projects in government facilities. On-bill programs have mostly focused on energy efficiency measures, though renewable energy and water efficiency projects may be eligible as well.
According to a 2016 report by Lawrence Berkeley National Laboratory, over 232,000 on-bill loans have been extended across the residential and commercial sectors, totaling more than $1.83 billion. In the commercial sector, on-bill financing has totaled roughly $775 million. Based on research by the National Conference of State Legislatures, on-bill programs for the commercial and industrial sectors are operating in 22 states as of 2016. Eight states have legislated the creation of on-bill programs, while the remaining states have programs operating without legislation.
Better Buildings Implementation Models
Learn More about On-Bill
- U.S. Department of Energy SEE Action Network — Financing Energy Improvements on Utility Bills: Market Updates and Key Program Design Considerations for Policymakers and Administrators
- American Council for an Energy Efficiency Economy (ACEEE) — On-Bill Financing Toolkit
- National Conference of State Legislatures — On-Bill Financing: Cost-Free Energy Efficiency Improvements
- Wilson Sonsini Goodrich & Rosati — Innovations and Opportunities in Energy Efficiency Finance
- Deutsche Bank Climate Change Advisors and The Rockefeller Foundation — United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models
|Basic Attributes||Project Type?Which project types can be financed using this option?||Focused on Energy Efficiency; Renewable Energy and Other Generation projects may be eligible as well|
|Applicable Sectors?Which economic sectors does this option commonly serve?||Common: Commercial & Industrial, Non-profit, Private Universities/Schools/Hospitals
Sometimes: Multifamily, Affordable Multifamily
|Geographic Scope?Is the financing option available throughout the U.S., or limited to certain areas that have the appropriate policies and programs in place?||Limited by utility|
|Building Ownership?Does this option work well for projects in leased space, owned space, or both?||Great for owned; works well for leased space so long as the renter is billed by the utility or is authorized to be considered an extension of the utility customer|
|Typical Project Size?What range of project sizes does this option typically serve?||$5K - $350K|
|Contract Structure||Contract Complexity?How complex is the financing option from the customer’s perspective, in terms of the size and complexity of the financing contract, the number of parties involved, and other factors?||Low|
|Parties Involved?Which types of organizations are typically involved in executing the financing option?||Customer, Utility, Contractor/ESCO, Private Financier (if OBR), Government Funder (if OBF)|
|Payment Type?Are customer payments fixed over time or might they be variable based on factors such as energy savings or utility rates?||Fixed|
|Performance Risk?Which party bears the risk that the installed equipment may not perform as expected?||Borne by customer|
|Tax & Balance Sheet||Budget Source?Do customer payments made on this financing option typically come from an operating budget ("opex") or capital budget ("capex")?||Opex|
|Balance Sheet Treatment?According to industry best practices, does the financing option typically appear as a liability on the customer’s balance sheet, or is it off-balance sheet?||Typically on-balance sheet; some tariff and service agreement structures may allow off-balance sheet|
|Tax Deductions?Which amounts can a customer typically deduct from its taxes under this financing option? In some cases all payments are deductible, and in other cases only interest and depreciation are deductible.||Typically depreciation and interest; all payments might be deducted if treated as off-balance sheet|
|Equipment Ownership?During the financing term, is the efficiency equipment typically owned by the customer (internal) or by an outside party such as the lender or contractor (external)?||Typically internal unless treated as off-balance sheet|
|Collateral Source?Which customer assets can the lender use as collateral to secure repayment?||Equipment, service termination|
|Contract Terms||Typical Duration?How long does a typical financing contract last?||2-15 years|
|Typical Close Time?How long does it typically take to secure financing once you start speaking with providers?||Short (1-3 months)|
|Market Attributes||Market Size?What is the total cumulative dollar value of projects financed under this option?||$1.83B cumulative residential and commercial since the 1970s; $775M commercial|
|Time in Market?How long has this financing option been available in the market?||Since the 1970s|