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 other projects. Assuming loan 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—State and local governments can develop their own internal RLFs to create a pool of capital for ongoing investments in clean energy. These programs start with a fixed pool of internal funds to pay for projects; then monies are "lent" internally to specific projects; next, some, or all, of the savings that accrue from the improvements are repaid to the RLF; finally, 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 Loan Funds—State and local governments can develop external RLFs to provide financing to the private sector. 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. Most states have established loan programs for energy efficiency and renewable energy improvements.
Program Funding and Design
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. Improvements 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 (MUSH) market and the small business market to provide cheaper access to credit for building improvements with shorter paybacks (so the funds can be quickly recharged and reused).
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.
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.
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 or co-lending (contributing public capital to support a portion of private loans).
RLF programs can be administered fully in-house, delegate a majority of responsibilities to a third party, or land somewhere in between. Factors to consider in selecting an administrative structure include the program's financial structure and staff capacity and expertise.
Administrative roles and responsibilities can include, but are not limited to:
- Program marketing and training
- Project eligibility
- Loan origination and underwriting
- Loan servicing
- Program performance (inc. federal reporting as required)
- Secondary market transactions
Potential third-party partners capable of supporting RLF responsibilities:
- Housing finance agencies
- Finance authorities (e.g., port authorities)
- Green banks
- Community development financial institutions
- Other non-profit or for-profit service providers and financial institutions
Interested in setting up an RLF but not sure where to start? These steps can help you get started:
- Research existing RLFs in your area or other regions similar to yours and learn more about the basics of RLFs and how they can be used to support your clean energy goals. The RLF Resource Library includes foundational resources for learning about RLFs and case studies of model RLF programs.
- Set goals for your RLF. Assess gaps in access to finance in the market and consider how your RLF could fill those needs.
- Target a sector or a combination of sectors, based on your RLF goals. Set borrower and project eligibility requirements based on your program goals and target sector.
- Select a financing structure tailored to your program goals and target sector. Decide how the program will be capitalized and how private capital may be leveraged in the chosen structure. Consider loan terms and underwriting criteria.
- Establish administrative and third-party support. Determine the roles and responsibilities of program staff and/or administrators.
- Launch and manage the RLF. Drive uptake with marketing and outreach to your target sector(s); assess program performance and adapt the program as needed to support your goals; and provide technical assistance to RLF borrowers.
Pros and Cons of Revolving Loan Funds
- Simple to set up compared to other financing 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 low or no interest.
- Need to have the capital to start the fund.
- Staff time and expertise is often required to set up and manage an RLF.
- Can be 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.
- RLF Resource Library includes foundational information to learn about, design, and manage an RLF program and includes case studies and sample documentation to inform the development of RLF programs.
- Revolving Loan Fund Bootcamp offers an introduction to RLF basics and design considerations led by experts from Berkeley Lab (download the presentation slides and view the recording).
- Energy Efficiency and Conservation Block Grant (EECBG) Revolving Loan Fund Blueprint provides resources to states and local governments looking to utilize EECBG awards to implement revolving loan funds, including internal RLFs.