Distributed Energy Utilities - It's All About Financing

by Martin Tampier
May 22, 2006

Many small-scale renewable energy systems have pay-back times of ten years or less. Putting a solar hot water system on your rooftop should be a no-brainer in most geographic zones. So why don't more people invest in distributed energy? The answer: the lack of attractive financing options is the main reason why they are not yet mainstream, not the capital cost of renewable energy systems. The new concept of "distributed energy utilities" can overcome this hurdle, as several examples from around the world have shown.

Distributed renewable energy systems, in the sense of this essay, include all small-scale renewables, i.e. small wind turbines, solar PV, solar thermal, geothermal heat pumps, micro-hydro systems, biomass and possibly even energy efficiency measures - applications mainly used in the residential sector. Israel is the only country in the world that has mandated renewables - that is, solar thermal systems - in new construction, and California requires a certain percentage of solar PV. Similar policies were implemented by municipalities, such as Barcelona (Spain). This, of course, is a very efficient mechanism to further distributed renewable energy systems. However, so far we are not seeing this happen in most other countries.

Tax incentives and buy-downs or grants are the most popular policy tools used to further the adoption of such technologies. However, this still leaves the buyer with the task of financing the remaining capital cost. Grant programs therefore often only capture "early adopters" - as it seems, often the well-to-do that are very motivated to invest in renewables, but are not necessarily short of funds to do so. The assertion is that two types of incentives are required to achieve greater market penetration: a) awareness and education and b) financing. The counterintuitive aspect of this concept is that most existing incentives, including net metering, tax benefits and grants or buy-downs, are counted as educational and awareness tools only. This is because they don't address the question of financing; they only reduce the up-front cost or create an income stream that facilitates financing. While this is good, such measures have not seen the success that renewable energy advocates would hope for. International experience shows that renewable energy loans can be more successful than grant programs.

An example is India. In a recent Renewable Energy Access article the Indian soft loan program for solar thermal installations was described. Before this program was introduced, the Ministry for Non-Conventional Energy Resources provided a capital subsidy for solar water heaters. The bureaucracies of the processes of availing capital subsidies, with the lack of appropriate financing deterred market growth. Even a 30% capital subsidy on the solar water heaters did not entice either new manufacturers or potential clients. A policy change in the mid-nineties, from capital subsidy to interest subsidy, completely changed the scenario. Subsidising bank rates made low-interest loans available to the general public. Rates for individuals are 2%, and 5% for commercial entities. The effect: in the State of Karnataka alone, the number of manufacturers increased tenfold from six to more than 60 in 2005.

In Germany, the Credit Agency for Reconstruction (KfW) provides low-interest loans for a range of energy efficiency measures in residential buildings , as well as solar PV systems , biomass and geothermal. Current interest rates for PV are 4.1 to 4.4%. In 2005, KfW accepted over 17,000 residential funding requests for a total of 139 MW. It is the combination of low-interest loans and a generous feed-in tariff that stimulates the tremendous growth in the German PV market, which has now even left Japan behind in terms of annual new solar PV installations.

In California, the Sacramento Municipal Utility District's (SMUD) Solar Domestic Hot Water Program provides rebates of $1500 for residential solar water heating systems. In addition, SMUD offers 100% loan financing to cover the remaining costs, with a ten-year repayment period. The initiative has led to the installation of 3000 units. Similar programs are available in many other U.S. states for both energy efficiency and renewable energy systems.

Canadian power utility Manitoba Hydro provides loans to install heat pumps through its Earth Power Program. These loans are fairly market-oriented and do not provide an interest advantage over usual bank loans. However, the fact that these loans are promoted through the utility and can be paid back over the utility bill have made Manitoba the national leader in terms of heat pump installations: 30% of Canada's systems are installed in the province, which only accounts for about 10% of Canada's population.

Clearly, providing attractive financing options has made all the difference for distributed renewables in these countries. But is it always necessary that financing is provided directly through government or banks?

In Britain, energy service company EcoCentroGen (ECG) provides distributed energy systems for large residential and mixed residential/commercial developments. The company guarantees that the overall captial costs for the developers will not increase as compared to a conventional energy system. Its offer not only includes electricity services, but also heat, water, Broadband, TV & telephony for residential end users. ECG also educates and encourages its customers to use less energy. Its cost is recovered over long-term service contracts for the entire bundle of services, which undercut competing offers by 10%. Not only do homeowners not have to finance the renewable energy system, but they also save space in their home as they may no longer need room for residential heating systems and fuel storage.

Canadian company Earth Energy Utility had a similar concept and installed heat pumps in large residential and commercial developments, offering heating services at a fixed price for 50 years - very effective to hedge against price increases in the oil & gas sector. Sadly, the company experienced serious problems in sourcing drilling services for heat pump installations in Canada and saw business growth hampered for a variety of reasons. It is now moving to Britain, where the climate for renewable energy systems is better due to generous government support, such as the Clear Skies Program, which provides grants of GBP 1,200 per heat pump installation.

Also in Canada, newcomer Lifetime Energy, an initiative of Waterloo Hydro (Ontario) and NextEnergy, offers heat pumps to residential and commercial customers. The company makes use of the promotional value and increased credibility created by the fact that financing works through electric utility bills - Lifetime Energy actually pays Waterloo Hydro for its billing services. Once the loan for the heat pump is paid off, the company retains ownership of the heat exchange coil in the ground and provides heating services at a stable monthly rate way under natural gas or electricity heating options. Only a few months into its offer, Lifetime Energy has received five to seven calls a day. A similar initiative of an Ontario utility that offered buy-downs for heat pumps but no financing only generated three calls in one year. British Columbia company Geotility Corp. pursues a very similar concept, and natural gas utility Terasen Gas also leases the ground loop of heat pumps to homeowners in Sun Rivers, Canada's first 200-home geothermal community. Finally, ThermUtility will equip 500 homes with a combination of geothermal space and solar hot water heaters in 2006, while retaining ownership of these systems, only charging homeowners for the energy they consume. The company plans to extend this offer to all of Canada in 2007.

It is easy to see how such concepts could be expanded to other jurisdictions and could include all types of renewables. There appears to be a great opportunity for the private sector to work as "distributed energy utilities" that provide services to their residential or commercial customers, but retain full or part-ownership of the renewable energy systems, or provide long-term financing. Ideally, homeowners should not pay more on their utility bills than before - due to savings incurred by the renewable energy systems - making the installation of distributed energy systems an easy, no-regrets decision. This concept is already working well in the commercial and industrial sector through so-called energy service companies, but has not yet reached the residential sector. But even the commercial sector still has lots of room for improvement: when will se see a solar or wind energy contractor lease the air space of Wal Mart or Zellers stores to install renewable energy systems on these huge unexploited surface areas?

The concept can complement existing in initiatives like buy-downs. In fact, it will work best where such incentives are already in place. Teaming up with utilities has paid off for some of the companies that have ventured out into this new field of activity: the credibility of utilities is high in customers' minds, and if they can be won to cooperate in a loan system and book monthly charges off through utility bills, this will have a great positive impact on the success of private ventures. Finally, there is a great opportunity for municipalities to play a role. London (UK) mayor Ken Livingstone has created new rules such that building permits for new developments are only granted if renewable energy systems and energy efficiency have been duly considered as part of the planning process. EcoCentroGen has found this condition extremely helpful in their endeavour to provide distributed energy services. The City of London is even working towards creating its own energy service company that will deliver cogeneration, geothermal, solar PV and solar thermal energy services in the capital.