Failure of Debt-Based Energy Efficiency Programs

Written By: Daniel Baker

Historically marginalized people are barred from traditional financing solutions. The status quo excludes based on hundreds of years old-disparities. This post explores the failures of debt-based tools in the energy efficiency sector.

Wealth Gap Widens

At this point, inequality is synonymous with America -- the G7 nation with the highest level of income inequality among the world’s wealthiest countries.

It’s common knowledge that white families have accumulated far more wealth than people of color, here in the U.S. Decades of redlining robbed non-white neighborhoods of critical funds to improve the quality of life, including homes and businesses.

Solutions to address this issue have fallen woefully short of closing that glaring gap. According to a Brookings Institute report examining the Black-white wealth gap, even the 2008 financial crisis didn’t level the playing field!

“The historical data reveal that no progress has been made in reducing income and wealth inequalities between black and white households over the past 70 years," wrote economists Moritz Kuhn, Moritz Schularick and Ulrike I. Steins in their analysis of U.S. incomes and wealth since World War II.

As of 2016, the most recent year data is available for, white families have ~11.5 times as much wealth as Black families. Less saved up for investing in their homes and businesses -- even if such upgrades lead to improved health, comfort, functionality, and a cleaner environment.

Perhaps that’s why the Center for American Progress listed protecting housing from climate change [easily extrapolated to small businesses as well] as a key proposal to reduce the Black-white wealth gap.

Loans Lack Penetration

Looking at the entire country, ~40% of American households can’t afford a $400 emergency. 
Energy efficiency upgrades are far from what would be deemed an immediate threat to one’s livelihood and installing an electric heat pump or solar panels cost far more than that.

To implement those changes, a small business or community center might -- the primary buildings we serve -- would likely have to take out a loan. The history of loans in America is pretty similar to the wealth gap. Rampant racism when it comes to student debt, acquiring a mortgage for housing, and especially when it comes to the COVID-19 PPP loans.

Loans assess three things, primarily; income, savings (i.e. wealth) and good credit. In essence, the financier needs to determine the likelihood that you will pay them back, with interest. The less likely, the higher the interest rate, which makes it more expensive to borrow money for people who have less of it to begin with -- through no fault of their own, as we’ve detailed thus far.

A 2021 study by Greg Leventis at the Lawrence Berkeley National Laboratory examined who received loans for energy efficiency upgrades. The findings are, unfortunately, unsurprising. These carefully designed programs have a pitiful 0.1% market penetration rate. Programs supposedly designed to help people with low credit scores obtain loans by buying down the interest rates, are missing the mark. Instead, 90% of the loans went to people with credit scores well above the national average.

Tax rebates are also structured so that benefits reach households that can afford the initial outlay of capital. So while the government is quick to pass incentives in the form of money back at the end of the year, that locks out a huge potential customer base that doesn’t have the immediate funds to pay for upgrades or secure a loan.

C-PACE, See Predatory Practices

The most recent “innovation” in the clean energy efficiency financing space has been the PACE and C-PACE programs. As per the Department of Energy:

Commercial property-assessed clean energy [C-PACE] is a financing structure in which building owners borrow money for energy efficiency, renewable energy, or other projects and make repayments via an assessment on their property tax bill.
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According to PACENation market data, 36 states and the District of Columbia have passed laws enabling C-PACE programs as of 2017. However, only 22 states plus D.C. have active C-PACE programs in operation.

At first glance, that seems like an improvement on the previous mechanisms. The problem is, if the energy savings don’t match the estimates or something else happens where you can’t pay your bill anymore, you can lose your entire property. Last Week Tonight with John Oliver covered the predatory nature of the PACE/C-PACE programs, earlier this year.

So...What’s the Answer?

Historical and systemic barriers prevent people of color and less wealthy people from accessing economic assistance. Likewise, these communities often deal with high energy burdens and are far more likely to live in areas near dangerous pollution -- disparities that energy efficiency can help alleviate. 

While programs exist -- both at the federal and state levels -- to alleviate this disparity, we typically see a donut effect. Loan programs reach either the wealthiest people or the least wealthy on the outskirts, while everyone in the middle is stuck between an inaccessible tax rebate or impossible loan.

As we look forward, there’s a better way forward: Inclusive Utility Investment programs are sweeping the nation! More on that in next month’s blog post.