$100 Million Energy Efficiency & Water Conservation Loan Program for Sonoma County

 

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The Sonoma County Board of Supervisors and Water Agency will kick off a new $100 million energy efficiency and water conservation loan program, called the “Sonoma County Energy Independence Program”.

The program is one of the early fruits of the innovative AB 811, which provide green finance via the creation of energy efficiency financing districts - something that we’re quite passionate about.

FACT: Sonoma County is the very first public body in California using AB 811 to create an energy efficiency and water conservation financing program for the entire county.

AB 811 plays a key role here (we’ve posted about it before, here and here) because it allows California counties and cities to form “contractual assessment programs” to provide loans for the installation of solar panels and other energy efficiency improvements to property owners. The loans are repaid via an assessment on the owner’s property tax bills over time — up to 20 years.

Since these loans facilitate energy reduction and with that greenhouse gas reductions across the entire jurisdiction, AB 811 is a key policy tool that cities and counties can use to comply with climate change commitments required of them.

Add to that the green jobs bonus –> they also hope that funding $100 million in loans over the next few years will translate into a big economic boost to Sonoma County’s green building industry.

Energy Efficiency Financing Districts - Pro’s & “Issues to Watch”

Pro’s

• Helps cities and counties directly reduce greenhouse gas emissions in their jurisdictions.
• Low capital, relatively “painless” way for property owners to pay for upgrades to obtain desired energy reductions and water conservation on their properties.
• Very competitive source of capital: Sonoma County, for example, may charge 400 bps over like term US Treasuries + 50 bps. A full 20 year term would result in an all-in interest rate of 7.5-8 percent, which is not bad compared to typical commercial banking rates for the similar improvements.
• Actual credit terms for property owners are easier than traditional bank debt: no credit checks or income requirements are needed to qualify for the loans.
• Green jobs bonus –> Sonoma County hopes that $100 million in loans over the next few years will translate into a big economic boost to Sonoma County’s green building industry.

Issues to Watch

• No one knows for sure what the true loan volume will be. Sonoma County and water agency officials are reporting that earlier surveys of property owners indicated a high level of interest in this program, so they are expecting brisk business.
• “Warehousing” and bond market risk: Sonoma County is funding initial loans and costs out of pocket. It is relying on the bond market to become the eventual source of capital for follow on loans. The success of their program is tied to achieving bond market at rates that are feasible given the lending rates to the property owners. The bond market has no experience with these types of loans, so their eventual pricing remains “open”. If the bond market demands much higher pricing for these loans than projected when original loans were funded (meaning that it doesn’t like these deals), that would make a bond offering unsuccessful, forcing the County to hold these loans on its own books and restricting capital meant for other obligations.
• Already overleveraged property owners can possibly get further into debt, due to the easy credit terms of these loans.
• No one knows if the total amount of these programs is really enough to achieve the required emissions reduction targets.

Despite some of the open issues, this type of program is still, in our view, quite innovative. Given the a) generally tough state of traditional finance markets, b) the need to use financial tools to reduce energy, water and greenhouse gas emissions as well as c) the easier credit terms the property owner could obtain with county and water district funds anyway — this type of green financing is not only timely but compelling.

Congratulations and good luck, Sonoma County!