Revolving Loan Funds

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Revolving loan funds (RLFs) are pools of capital from which loans can be made for clean energy projects—as loans are repaid, the capital is then reloaned for another project. Assuming that defaults remain low, RLFs can be "evergreen" sources of capital that are recycled over and over again to fund projects well into the future. State and local governments can establish RLFs to support both their own energy upgrades (i.e., internal), and those in private sector (i.e., external).

Internal Revolving Loan Funds

In order to create a pool of capital for ongoing investments in clean energy, some organizations have developed their own internal RLFs. These programs start with a fixed pool of internal funds to pay for projects, monies are "lent" internally to specific projects, and then some or all of the savings that accrue from the improvements are repaid to the RLF. The replenished RLF can then be used to fund additional projects. Internal RLFs are often more an "accounting treatment" than a formal fund, but can be an effective tool for capturing and using the energy savings from clean energy improvements to fund additional facilities investments.

External Revolving Loans Funds

There are a number of entities that can administer revolving funds, but here we focus on government-sponsored and managed RLFs. Government-sponsored RLFs typically offer lower interest rates and/or more flexible terms than are available in commercial capital markets. These programs often focus on financing the cost of efficiency upgrades, such as appliances, lighting, insulation, and heating and cooling system upgrades.

Depending upon each government's situation and need, RLFs can be capitalized through a variety of sources, including state bond proceeds, treasury investments, ratepayer funds, and other special funds.

To date, more than 30 states have established loan programs for energy efficiency and renewable energy improvements. However, the ability of the states to attract borrowers has varied widely due to numerous factors, including interest rates, loan terms, credit requirements, and marketing effectiveness.

Program administrators typically set the interest rate for RLFs either by pegging the rate to their own borrowing rate, or by using program funds to buy down the interest rate to more attractive levels. The majority of loan terms are shorter than 10 years. Some programs require loans to be secured by additional collateral, while others create loan loss reserve funds to serve as a cushion for potential defaults.

It is important to note that simple RLFs funded directly with public funds do not leverage private capital; they also tend to "revolve" quite slowly (depending on the loan term length). This means that public dollars can have a relatively limited impact in the near term compared to the opportunity to leverage private funds by using the public funds as a credit enhancement.

An RLF is an effective tool for residential energy efficiency improvements in the $2,000 to $10,000 range that are too expensive for a cash/credit purchase but do not warrant taking out a second mortgage or equity line. This could range from urgent equipment replacements (such as a furnace that goes out in the middle of winter) if the program is able to process loans quickly enough, to whole-home efficiency retrofits.

RLFs are also effective for the municipal, university, school, hospital market and small business market to provide cheaper access to credit for building improvements with shorter paybacks (so the funds can be quickly recharged and reused).

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Advantages

  • Simple to set up compared to other options, and many cities and states already have RLFs for other purposes, so expertise may exist in-house
  • Cheap, potentially evergreen source of funds that will be available in the long-term
  • Can shape eligibility requirements to fit many markets and program goals
  • Can have no or no interest

Disadvantages

  • Government often acts as the administrator; requires staff time and expertise to set up if there is not an existing RLF
  • Need to have the capital to start the fund
  • Often slow to revolve, especially with longer loan terms (often needed for comprehensive projects)
  • Must conduct rigorous credit analysis on borrower's ability to pay (or risk a high default rate)
  • Costly collateral or security may be required from borrowers