Energy efficiency investments return economic and environmental benefits. However, financial barriers related to these investments can prevent these benefits from being realized.

To help spur investments in energy efficiency, some states manage energy efficiency loan programs. These programs offer a reduced interest rate on money borrowed for the purchase of energy efficient equipment. Lower interest rates allow an improved cash flow for borrowers. Banks have decades of experience with energy efficiency loans, so they routinely loan funds for these projects.

In addition, state governments interested in encouraging the use of renewable energy may provide low-interest loans to hep purchase renewable energy equipment. Renewable energy equipment may include conversion tools necessary to harness solar, wind, biomass, hydro, and geothermal power.

Loans are available in some states to residential, commercial, industrial, transportation, public, and nonprofit sectors. Typically, interest charges are offered at a fixed rate slightly below market. Rates in some states may be as low as 0%. Repayment schedules vary; some are determined on an individual project basis, others offer a 7-10 year loan term.

Some states use revolving loan funds that are designed to be self-supporting. In these cases, loans are funded until they reach the fund's cap. Administrative costs for these loan funds are usually less than 5%. Fund capitalization comes from a range of sources, from old Petroleum Violation Escrow funds to System Benefits Charges.

Decision makers may take several factors into consideration when designing these loan programs. Before loaning funds for energy efficiency investments, many states require that the investments pay back in less than 7 or 10 years. Some programs have sliding scale interest rates based on income levels, but most states offer one below-market rate for all participants. Some programs limit eligibility based on income or type of property.

Some programs buy down the lender's interest rate to make a loan more attractive to investors. Let's say an energy audit recommends that a business install new energy efficiency equipment, which will cost $280,000. In this hypothetical case, the bank offers a 9.5% interest rate on the loan, which can be repaid over five years. The loan is bought-down to 5% by a loan program (9.5%-4.5%), which saves the investor approximately $36,000 in total interest paid.

Energy Efficient Mortgages (EEMs) are an increasingly popular type of energy efficiency loan. In use for more than 20 years but limited until recently, EEMs take the energy efficiency of the home into account when assessing a potential buyer's ability to purchase the home. This allows homebuyers to qualify for larger loans.

State energy efficiency loan experts say that the most important task in the program development stage is to arrange program participation by respected lenders. A core group of leading lenders helps provide important early credibility to the program and can help identify competitive rates for the program. Establishing an advisory group composed of lenders and their associations, realtors, local, and state government representatives, energy efficiency advocates, mortgage companies, and other relevant stakeholders also can be helpful.

Raising funds to start a revolving loan account may require new legislation, depending on the state. If funded through bonds, a loan program may require a year or more to organize. Simpler programs can be created in fewer than six months. Regardless of the funding source, a loan program requires a marketing/educational component to bring it to the attention of the general public and/or targeted audiences.

Loan programs may be managed by State Energy Offices, Departments of Natural Resources, Departments of Economic Development, Departments of Agriculture, Departments of Housing, and any other commercial or residential housing-related agencies.

Arguments for Loan Programs

• Many loan programs require applicants to demonstrate that they will reduce energy costs or increase energy efficiency before a loan is granted, thus ensuring positive program results.

• Loan programs may offer the means for some low and moderate-income homeowners to purchase renewable energy equipment and implement energy efficiency improvements.

• Loan programs may provide local governments, utilities, and independent power producers an opportunity to upgrade their electric power facilities.

• Because these incentive programs are loans and not grants, states are guaranteed to recoup their investments in renewable energy equipment purchases and energy conservation projects.

• Loans ultimately result in more disposable income for consumers.

• Banks have decades of experience with energy efficiency loans; these loans are considered proven and less risky than other loans.

• Energy efficiency loan programs can allow households and small businesses to make upgrades and avoid wasting money on unnecessary energy expenses.

• Energy efficiency loan programs traditionally require low administrative costs.

• Energy efficiency investments made as a result of these loans usually result in less pollution and improved environmental quality.

• Investment in energy efficiency results in lower costs to ratepayers by deferring or avoiding the need to build additional power plants.

Arguments against Loan Programs

• Only a small percentage of available loans is offered to residential homeowners; most are designed to aid industrial and commercial entities that may be able to fund energy efficiency measures and technologies on their own.

• Most state programs do not offer loans to fund research and development projects.

• Energy efficiency loans can require extensive documentation and paperwork.

• The funds applied to these loan programs may be better used in another area of the economy.

• Utilities should provide these programs.