Can Finance Programs Replace Traditional Rebates?

Can Finance Programs Replace Traditional Rebates?

Mike Rovito for Zondits, May 21, 2014

Energy efficiency finance programs – PACE, on-bill, and so forth – offer an exciting contrast to traditional rebate programs. As opposed to the current model of giving cash to projects that reduce load on the grid, finance programs actually get paid back! From the standpoint of utilities and government, the deal couldn’t be much sweeter. It is not hard to see why the concept is so alluring and why it has had so many in efficiency circles excited for so long.

As the idea has taken hold, even private sector finance firms are getting involved and looking to build the securitization markets necessary to make energy efficiency financing as ordinary as car loans or mortgages. The idea of replacing ”subsidies and rebates with loans and leases” as has been discussed widely (most recently at the ACEEE Finance Forum in Washington DC last week) is ultimately flawed. Finance programs can be a useful complement to traditional rebate programs, but not a replacement. Here’s why.

Although they both put money in people’s hands, rebate programs and finance programs target two different problems. Rebate programs are justified because of the gap between the customer-experienced cost of energy and the social costs of load growth. For customers, the average cost of energy is low enough that only a subset of efficiency projects – let’s say lighting projects, for example – are economically justifiable to most end users without subsidies. But at the margin, for energy producers and distributors, it costs more money to build wires and power plants than it does to use energy more efficiently in a wide range of projects including more expensive and complicated projects such as HVAC upgrades. Rebates are intended to close the gap between the customer-experienced payback (which may exclude HVAC upgrades) and the societal payback (which might find those same HVAC upgrades compelling). Indeed, this gap is not the only barrier to demand-side management, but it is a foundational one.

Finance gets at one of the other gaps: lack of capital. Many program managers and industry participants think that rebate programs are intended to address lack of capital. Rebates address this issue, but only partially, which has created an opening for finance. Lighting projects, for example, may be economically viable based on customer economics alone, but the customer may not have enough money – and the rebate might not be enough to cover the difference. Additionally, many rebates or incentives are only delivered after the project is installed. Finance can step in and fill that hole. But finance doesn’t change the underlying economics of longer payback measures, which require some form of subsidy to bring customer economics in line with societal economics.

Admittedly, this analysis is a simplification. It is important to remember that traditional programs provide more than just rebates. Among other things, they provide information and motivation, two critical ingredients to moving energy efficiency projects off the block. Financing is one more tool to add to this tool kit, but it cannot replace traditional programs.